Hopefully, the risk of a synchronized global slowdown will subside by the end of 2022. For the time being, however, the odds of recession in Europe, the US, and China are significant and rising, and a collapse in one region will increase the odds of a recession. crash into others.
CAMBRIDGE – Is the global economy headed for a perfect storm, with Europe, China, and the US going into crisis at the same time later this year? The risks of a global recession trifecta are increasing by the day.
A recession in Europe is all but inevitable if the war in Ukraine escalates and Germany, which has been fiercely resisting calls to stop receiving Russian oil and gas, finally relents. China is finding it increasingly difficult to sustain positive growth in the face of draconian Covid-19 lockdowns, which have already brought Shanghai to a grinding halt and now threaten Beijing.
In fact, the Chinese economy may already be in a recession. And with US consumer prices currently rising at their fastest pace in 40 years, the prospects for a soft landing in prices without a big hit to growth look increasingly remote.
Private and official economic forecasts have recently begun to highlight growing regional risks, but perhaps underestimate the extent to which these risks are multiplying each year. Widespread lockdowns in China, for example, will wreak havoc on global supply chains in the short term, driving up inflation in the United States and reducing demand in Europe. Normally, these problems could be mitigated by lower raw material prices. But with no clear end in sight in Ukraine, global food and energy prices are likely to remain high under any scenario.
A recession in the United States, especially if triggered by a cycle of interest rate hikes by the Federal Reserve, would restrict global demand for imports and throw financial markets into chaos. And while recessions in Europe typically radiate globally primarily through reduced demand, a war-induced slowdown could radically affect business confidence and financial markets globally.
How likely are these events to occur? China’s growth trajectory has been slowing for a long time. Only a combination of luck and very competent macroeconomic management prevented a severe crisis. But no amount of careful macroeconomic management can be the solution if the Chinese authorities have made the wrong decisions in the face of Covid-19.
Most Asian countries have already abandoned “Covid zero” strategies and are adopting regimes that treat Covid-19 as an endemic threat, not a pandemic. Not even China. There, the government is spending gigantic sums of money to turn vacant downtown office buildings into quarantine centers.
Perhaps the new quarantine centers are a bright idea, redirecting China’s bloated construction sector toward more socially useful activities than continuing to pile up new projects after years of overbuilding (something International Monetary Fund economist Yuanchen Yang and I warned in 2020).
Perhaps China’s leaders know something their Western counterparts don’t about the urgency of preparing for the next pandemic, in which case the quarantine centers might seem farsighted. More likely, however, China is fighting windmills in its attempt to tame the increasingly contagious virus, in which case the centers will prove to be a huge waste of resources, and the lockdowns useless.
The risk of a recession in the United States has certainly skyrocketed. The main uncertainties now are its duration and its severity. The optimistic view that inflation will come down significantly on its own, and that the Fed will therefore not have to raise interest rates too much, looks more dubious by the day. Savings have dissipated during the pandemic and the most likely scenario is that consumer demand remains strong, while supply chain problems will worsen.
True, the US government appears to be scaling back its stimulus policies, but that will add to recession fears, even if it helps mitigate inflation somewhat. And if stimulus programs continue in full swing – and, in an election year, why shouldn’t they? – the Fed’s job will be even harder.
As for Europe, a setback as a result of economic slowdowns in China and the United States would have threatened its growth even without the war in Ukraine. But the war has markedly amplified Europe’s risks and vulnerabilities. Growth is already weak. If Russian President Vladimir Putin resorts to the use of chemical weapons or tactical nuclear weapons, Europe will be forced to cut the cord decisively, with uncertain consequences both for its economy and for the risk of further escalation, which could entail impose sanctions on China as well. Meanwhile, European governments are under considerable pressure to significantly increase their national defense spending.
Clearly, emerging markets and poorer developing economies will suffer heavily if a global recession occurs. Even energy- and food-exporting countries, which have so far benefited economically from the war because of high prices, would probably be in trouble.
Hopefully, the risk of a synchronized global crisis will subside by the end of 2022. But for now, the chances of a recession in Europe, the US, and China are significant and rising, and a collapse in one region will raise the possibility of a collapse in the others. Unprecedented inflation is not making things any easier. I am not sure that politicians and policy makers are up to the task they may soon face.
The author
Former Chief Economist of the International Monetary Fund, he is Professor of Economics and Public Policy at Harvard University.
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