Economy Is at Risk of Recession by a Force Hiding in Plain Sight

Last week, it brought back the magnitude of the overlapping crises that struck the global economy, raising concerns about recession, unemployment, hunger and a plunge in the stock market.

Underlying this pain is a very fundamental force, with little justification for the mention — a pandemic. Its power is far from what was spent, and it brings significant uncertainty to policy makers. Their policy tools are better suited for the more typical recession, rather than the rare combination of slowing economic growth and rising prices.

Major economies including the United States and France He reported the latest data on inflation and revealed that prices for a wide range of commodities in June rose faster than any time in 40 years.

These tough numbers have increased the likelihood that central banks will move more aggressively to raise interest rates as a means of slowing price increases. This is a course that is expected to sacrifice employment, hit financial markets and threaten poor countries in the debt crisis.

On Friday, China reported that the world’s second-largest economy expanded by only 0.4% from April to June compared to the same period last year. Its performance has been surprisingly anemic by decades and has jeopardized the outlook for many countries that frequently trade with China, including the United States. It strengthened the perception that the world economy has lost a significant engine.

The slowdown in economic growth and fears of rising prices have revived the horrifying words of stagflation in the 1970s, when the world last suffered from similar problems.

Most of the challenges that tear the world economy have been caused by the global reaction to the Covid-19 epidemic and the consequent economic shocks, despite the recent turmoil, exacerbated by Russia’s devastating attack on Ukraine. .. Supply of food, fertilizer and energy.

“The pandemic itself is not just about the production and transportation of goods, which was the original front line of inflation, but also about how, where, how and where we educate our children, a global migration pattern. Confused, “said the University of Texas at Austin last week. Discussion Convened by the Brookings Institution in Washington. “Almost all of our lives were confused by the pandemic, and then we wage war in Ukraine.”

It was a pandemic that urged the government to impose a blockade to limit its spread and blocked factories from China to Germany and Mexico. When people were trapped in their homes, they ordered a record amount of merchandise (exercise equipment, kitchen equipment, electronic equipment). This overwhelmed the ability to manufacture and ship them and caused significant supply chain disruption.

The resulting product shortage has pushed up prices. Companies in a highly concentrated industry, from meat production to shipping, have taken advantage of the market to make record profits.

The pandemic has allowed governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit unemployment and bankruptcy. Now, many economists claim that while the Federal Reserve is taking too long to raise interest rates, they are overdoing it, stimulating purchasing power and causing inflation.

Central banks like the Fed are now aggressive, raising interest rates in a hurry to get rid of inflation, even while fueling concerns that it could cause a recession.

Given the confusion of conflicting indicators in the US economy, it is difficult to predict the severity of the slowdown. The unemployment rate (3.6% in June) is at its lowest point in almost half a century.

However, fears of rising prices and the recent slowdown in US consumer spending have heightened fears of a recession. Last week, the International Monetary Fund announced kill Expectations for US economic growth this year will range from 2.9% to 2.3%. Avoiding the recession is “more difficult,” the fund warned.

The pandemic is also at the center of the account of China’s uncertain economic slowdown, which will probably widen the shortage of industrial products while limiting export motivation around the world, from Thai auto parts to Brazilian harvested soybeans. I have.

China’s Zero-COVID policy has been accompanied by the blockade of Orwell, which generally constrains business and livelihoods. According to a recent estimate by Japanese brokerage firm Nomura, the government has expressed its determination to maintain lockdown, currently affecting 247 million people in 31 cities and generating a total of $ 4.3 trillion in annual economic activity. I am.

But the patience of Beijing’s stance, the willingness to continue to overcome economic damage and the wrath of the people, constitutes one of the more important variables in a world of uncertainty.

Russia’s attack on Ukraine exacerbated the turmoil. International sanctions have restricted the sale of Russia’s vast oil and gas inventories in order to put pressure on Russia’s leading leader Vladimir Putin for forgiveness. The resulting impact on global supply has caused energy prices to skyrocket.

Prices for a barrel of Brent crude rose nearly one-third in the first three months after the invasion, but the past few weeks have seen a reversal on the assumption that slowing economic growth will lead to lower demand. I did.

Germany, Europe’s largest economy, depends on Russia for nearly one-third of its natural gas. When the main pipeline that transports gas from Russia to Germany drastically reduced supply last month, it raised fears that Berlin could immediately distribute energy consumption. It will have a chilling effect on German industry, as well as fighting supply chain problems and loss of exports to China.

If Germany loses full access to Russia’s gas (potentially looming), it will almost certainly fall into recession, economists say. The same fate threatens the continent.

“For Europe, the risk of a recession is real,” UK research firm Oxford Economics said in a report last week.

For the European Central Bank, which has a lot of concerns in the market on Thursday, the outlook for a recession further complicates an already tough series of decisions.

Central banks, which usually serve economies that slide into recession, lower interest rates to make credit more available and promote borrowing, spending and employment. However, Europe is facing not only slowing growth, but also rising prices, which usually demands higher interest rates to curb spending.

The interest rate hike will not only support the euro, which has abandoned more than 10% of its value against the dollar this year, but will also raise import costs for the 19 countries that use the currency. This is another factor in inflation.

Adding to the complexity is that the usual central bank toolkit is not built for this situation. Navigating the balance between keeping work and controlling inflation is difficult enough in simpler times. In this case, rising prices are a global phenomenon, amplified by wars unaffected by sanctions and diplomacy so far, and combined with the mother of all supply chain entanglements.

Neither the Federal Reserve nor the European Central Bank has a lever to force action from Mr Putin. Neither has a way to clear the backlog of container ships that are blocking ports from the United States to Europe and China.

Kjersti Haugland, Chief Economist at DNB Markets, a Norwegian investment bank, said: “Many things are happening at the same time.”

The most serious danger is affecting poor middle-income countries, especially those with heavy debt burdens such as Pakistan, Ghana and El Salvador.

As central banks tighten credit in wealthy countries, investors have abandoned risky developing countries and instead evacuated to solid assets such as US and German government bonds, now paying slightly higher interest rates. I am.

This cash outflow has increased the cost of borrowing in countries from sub-Saharan Africa to South Asia. Their government is facing pressure to cut spending when sending debt repayments to creditors in New York, London and Beijing. Poverty increases..

The outflow of funds has pushed the value of currencies from South Africa to Indonesia and Thailand, forcing households and businesses to pay more for major imports such as food and fuel.

The war in Ukraine intensified all these dangers.

Russia and Ukraine are substantial exporters of grain and fertilizer. Countries traditionally dependent on wheat supplies, from Egypt to Laos, have seen soaring costs for staple foods such as bread.

The United Nations World Food Program has more than doubled the ranks of people considered “serious food insecurity” around the world since the pandemic began this month, increasing from 135 million to 276 million. Declared.

Among the biggest variables that determine what happens next is the one that caused all the problems, the pandemic.

Cold recovery in northern countries could lead to another wave of transmission, especially given the biased distribution of Covid vaccines that leave many of humanity vulnerable and risk the emergence of new variants. there is.

As long as Covid-19 is a threat, you will be discouraged from working in the office or eating at a nearby restaurant. You will be discouraged from boarding a plane, sleeping in a hotel room, or sitting in a theater.

Since the world was first struck by a public health catastrophe more than two years ago, it has been true that the ultimate threat to the economy is the pandemic itself. Even if policymakers are currently focusing on inflation, malnutrition, recession, and endless wars, that observation holds the currency.

“We are still suffering from a pandemic,” said Howgrand, an economist at DNB Markets. “We cannot look away because it is a risk factor.”