The global economy is entering the last quarter of 2021 with a growing number of headwinds threatening to slow the recovery from the pandemic recession and prove that policymakers’ benevolent views on inflation are wrong.
The spread of the Delta variant continues to disrupt schools and workplaces. US lawmakers are fighting over the debt ceiling and spending plans. China suffers from an energy crisis and pursues regulatory crackdown, while markets remain tense as Chinese company Evergrande Group struggles to survive.
Fuel and food costs are skyrocketing around the world, combining with congested ports and strained supply chains to elevate pricing pressures. Labor shortages continue to plague some employers.
While the expansion appears intact, such backdrop is stoking fears of a mix of weaker growth and faster inflation to come, threatening to complicate nascent central bank efforts to cut stimulus without shaking markets. .
“Expectations of a rapid exit from the pandemic have always been misplaced,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings in Hong Kong. “Full recovery will be measured in years, not quarters.”
Here is a breakdown of the main risks:
China has cracked
China’s energy woes have forced manufacturers to cut production and prompted economists to downgrade their growth forecasts. Bloomberg Economics expects power shortages to have the biggest impact on the expansion since a nationwide lockdown when the pandemic first erupted.
The regions affected by the restrictions make up about two-thirds of the economy and include the top five provinces in terms of gross domestic product – Guangdong, Jiangsu, Shandong, Zhejiang and Henan. Sign of the future, the plant’s activity contracted in September for the first time since the start of the pandemic.
This is worsening the drag from the crisis that has engulfed Evergrande, the world’s most indebted developer, and a wider downturn in the all-important housing sector. Pressure from President Xi Jinping for tighter regulation of industries, including technology, is also angering investors.
More expensive food and energy
China’s energy woes also risk triggering a further surge in global agricultural and food prices, as it means the country is bracing for a difficult harvest season for commodities such as corn, soybeans, peanuts and cotton. . Over the past year, Beijing has imported a record amount of agricultural products due to a domestic shortage, pushing global food prices and costs to multi-year highs.
A United Nations index is up 33% in the past 12 months. At the same time, some gas, coal, carbon and electricity benchmarks are breaking records.
The price of oil topped $ 80 a barrel for the first time in three years, and natural gas is the most expensive of the seven, helping push the Bloomberg Commodity Spot Index to its highest level in a year. TotalEnergies CEO Patrick Pouyanne said the gas crisis affecting Europe is expected to last all winter.
It could be even worse. Bank of America analysts tell customers there is a chance oil will hit $ 100, causing an economic crisis.
Supply in a hurry
As winter approaches in the northern hemisphere, the Delta variant remains another concern.
This helps explain why congestion is growing at major international trade hubs, including ports in Shanghai and Los Angeles, marshalling yards in Chicago, and warehouses in the UK.
Retailers, including Costco Wholesale Corp. in the United States, order whatever is possible to ensure shelves are properly stocked, especially for the year-end shopping boom.
Manufacturers, meanwhile, are struggling to source key parts such as semiconductors, chemicals, and glass.
Dubai’s DP World, one of the world’s largest port operators, expects the bottlenecks that have shaken global trade flows will continue for at least two years.
There is also a labor shortage in some industries, with the coming week’s US wage report providing a glimpse of the scale of the problem facing businesses in September.
The sparkle also comes from US economic policy as the engine of global recovery. While President Biden has thwarted a disruptive federal government shutdown for now through an interim financing bill, fractured discussions continue over his $ 4 trillion economic program with deep-seated divisions among its Democrats over the way forward.
The compromise on the shutdown came after Treasury Secretary Janet L. Yellen warned her department would actually run out of cash around October 18, unless Congress suspended or increased the limit on federal debt. Failure to do so would trigger both a recession and a financial crisis, Yellen said.
Globally, support for fiscal policy is expected to slow until 2022 after governments have racked up the biggest debt since the 1970s.
Biden and Yellen are also set to decide whether to give Federal Reserve Chairman Jerome H. Powell a second term, a move that could disrupt markets as well.
For Powell and his international counterparts, the combination of slower growth and stubborn inflation is a challenge.
On Friday alone, it was announced the fastest inflation in the eurozone in 13 years, and a U.S. gauge has risen the most on a year-over-year basis since 1991.
For now, Powell and European Central Bank President Christine Lagarde are expressing cautious optimism about easing inflation. But economists wonder when the transient becomes more persistent.
And that makes plans to cut bond purchases or raise interest rates a risky proposition. Many central banks in Latin America and some in Eastern Europe have already increased borrowing costs. Norway has just become the first developed country to do so and the Fed is signaling that it will cut its bond buying program as early as November.
Deutsche Bank strategist Jim Reid believes the global economy may be facing its most bellicose monetary policy period in a decade.
“Central banks are playing with fire by shrinking to avoid inflationary pressures without being completely sure of our position in the cycle,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis.