The global economy slowing

The war in Ukraine, rising interest rates, and lockdowns in China are all weighing on global growth.

It’s not just the United States — the global economy is slowing down.

Inflation in European countries has spiked as the war in Ukraine has pushed up prices for essentials like heating, gas, and food. China’s “zero Covid” policies of strict lockdowns and mass testing continue to disrupt the production of goods. And around the world, central banks are raising interest rates in an attempt to bring rising prices under control by weakening consumer demand.

The International Monetary Fund has lowered its growth outlook for 2023, projecting that the world economy will grow 2.7 percent in 2023, down from 3.2 percent this year. The IMF said in a report last month that the global economy was facing “steep challenges” as pandemic-related supply-chain disruptions, the war in Ukraine, China’s economic slowdown, and rising interest rates weigh on growth.

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” the organization said in the report.

In the United States, recession fears have grown and inflation remains stubbornly high. Some economists and investors have voiced concerns about the Federal Reserve’s aggressive interest rate hikes and how much they could weaken the world’s biggest economy. By making borrowing money more expensive, the central bank is trying to slow consumer demand, which should lead to slower price growth. But that could also trigger an economic downturn if businesses significantly slow hiring or lay off workers in response.

Still, some economists say the United States is actually in a better position than many other nations. European countries, for instance, are experiencing a dramatic slump because their energy supplies have been hurt more by the war in Ukraine. Many American households still have excess pandemic savings, and unemployment in the United States remains low.

“We’re raising interest rates fairly aggressively and financial market conditions have tightened in the US,” said Ryan Sweet, the chief US economist at Oxford Economics. “But so far, the economy’s weathered it reasonably well. Inflation is high in the US, but it’s high almost everywhere.”

Central banks around the world have lifted interest rates to combat surging prices. The European Central Bank started raising rates earlier this year, and officials recently signaled that they aren’t yet done. The Bank of England has also raised rates multiple times this year.

There are several factors contributing to economic instability globally, ranging from the war in Ukraine to China’s strict Covid policies and weakening property industry.

The war in Ukraine

The war in Ukraine has sparked an energy crisis in Europe, leading to a surge in prices. Countries that were more dependent on energy imports from Russia — such as Germany and Italy — have been hit especially hard by the restricted supply of natural gas.

Inflation in the Eurozone picked up 10.6 percent in October from a year earlier, up from 9.9 percent the month before. Inflation in the United Kingdom has also surged because of skyrocketing energy bills. In October, consumer prices in Britain climbed 11.1 percent from a year before.

The war has also disrupted exports of food such as wheat, sunflower oil, and other produce, straining the global food supply and pushing up inflation further.

These price increases could lead to a painful economic slowdown because things like food and gas tend to be necessary purchases for households. If European consumers are spending more of their budgets on those items, they have less money to spend on other goods and services, said Raghuram Rajan, a professor at the University of Chicago Booth School and a former chief economist at the IMF.

“Energy and food are an essential part of your household budget,” Rajan said. “The more you spend on essentials, the less you have on discretionary items, so you have to cut back on that spending.”

Pierre Lafourcade, a global economist at UBS, said European households also haven’t acculumated as much excess savings as Americans. Earlier in the pandemic, American lawmakers passed more stimulus measures and sent direct checks to consumers, leading to more robust savings that have helped cushion household budgets.

“You didn’t have the equivalent in the Eurozone,” Lafourcade said. “In the Eurozone and in the UK, they never had excess savings to begin with.”

UBS economists have predicted that the world economy will grow 2.1 percent next year, the lowest rate since 1993. Out of 32 economies, UBS expects 13 of them to contract for at least two quarters, which their economists say is akin to a global recession.

Although the war in Ukraine exacerbated global inflation, consumer prices were already on the rise around the world before Russia’s invasion. Workers testing positive for Covid led to factory shutdowns and increased demand for goods among American consumers pushed up prices for many goods. The IMF projected that global inflation will rise to 8.8 percent in 2022 from 4.7 percent in 2021, although the agency expects overall price increases to fall to 6.5 percent in 2023.

The main factors driving up inflation in the United States, however, have differed from countries in Europe.

Karen Dynan, an economics professor at Harvard University and a nonresident senior fellow at the Peterson Institute for International Economics, said inflation in the United States has affected a broader array of goods and services compared to other countries, in part because of strong consumer demand. Earlier in the pandemic, people stuck at home ramped up spending on items like exercise bikes and work-from-home equipment. Supply chain disruptions also made it harder to produce and transport goods around the world, leading to a spike in prices.

Inflation in Europe has mainly been driven by rising energy and food costs as a result of the war in Ukraine, Dynan said. If energy and food costs subsided, that would significantly help ease rising prices in European countries, but that would have less of an impact on bringing down overall inflation in America, she said.

“In the United States, that’s not enough to take care of our inflation problem because our inflation is broader,” Dynan said.

China’s economic slowdown

China is under “extreme duress” because of its stringent Covid policies and weakening property industry, said Kenneth Rogoff, an economics professor at Harvard University and a former chief economist at the IMF.

China’s economy — the world’s second-largest — has taken a toll because of its attempts to eradicate Covid outbreaks through extensive lockdowns and mass testing efforts. Although economists expect China’s economy to rebound in growth next year as restrictions potentially ease, the “zero-Covid” approach has already disrupted the production of goods, weakened consumer spending, and led to growing protests against the policies.

The nation’s property sector, which makes up about one-fifth of economic activity in China, has also significantly weakened. For years, China’s housing industry saw rising sales and real estate prices. But excessive borrowing from developers has led to construction delays and falling home prices in the past year, sparking anger among Chinese homeowners. The Chinese government issued several directives earlier this month to boost its property industry, but economists say the sector is unlikely to see a quick rebound.

Although Rogoff said the United States economy is in “distinctly better shape right now” compared to European countries and China, he said a weaker global economy has many negative implications for American consumers. If consumers in other countries can’t afford to buy as many American goods, that can hurt American businesses and their exports. If businesses with large operations abroad are earning fewer profits in those countries, that could translate into lower salaries for their workers in America, Rogoff said.

And even though the US economy is holding up now, the country could still see a painful downturn in the coming months as the Fed continues to raise interest rates.

“If we over-tighten, we’ll probably be doing worse than Asia,” Rogoff said. “Whether we’ll be doing worse than Europe, that’s a low bar.”

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By: Madeleine Ngo
Title: Why the global economy is slowing
Sourced From: www.vox.com/policy-and-politics/2022/11/29/23465254/global-economy-world-slowdown-inflation-pandemic-ukraine
Published Date: Tue, 29 Nov 2022 12:00:00 +0000

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