The risk of recession in Europe, the United States and China is increasing day by day | Kenneth Rogoff
IIs the global economy blowing up in a perfect storm, with Europe, China and the US all entering recession at the same time later this year? The risks of a trio of global recessions are increasing day by day.
A recession in Europe is almost inevitable if the war in Ukraine escalates and Germany, which has fiercely resisted calls to disconnect 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 crippled Shanghai and now threaten Beijing. In fact, the Chinese economy may already be in recession. And with consumer prices in the United States now rising at their fastest pace in 40 years, the prospects for a soft landing in prices without a big hit to growth seem increasingly remote.
Private and official economic forecasts have recently begun to highlight growing regional risks, but perhaps understate the extent to which they are multiplying. Widespread shutdowns in China, for example, will wreak havoc on global supply chains in the near term, increasing inflation in the United States and lowering demand in Europe. Normally, these problems could be mitigated by lower commodity prices. But with no clear end in sight in Ukraine, global food and energy prices are likely to remain high under all scenarios.
A recession in the United States, especially if triggered by a cycle of interest rate hikes by the Federal Reserve, would reduce global import demand and trigger chaos in financial markets. And although recessions in Europe normally radiate globally primarily through a drop in demand, a war-induced slowdown could drastically shake business confidence and financial markets around the world.
What is the probability of each of these events? China’s growth trajectory has been slowing for a long time, only a combination of luck and generally competent macroeconomic management have prevented a severe downturn. But no amount of prudent macroeconomic management can save the day if China’s leaders made the wrong choice on Covid-19.
Most Asian countries have now abandoned zero Covid strategies and are moving to regimes that manage Covid-19 as an endemic threat but do not treat it as a pandemic. Not China. There, the government is spending colossal sums to convert empty downtown office buildings into quarantine centres.
Perhaps the new quarantine centers are a brilliant idea, offering a way to redirect China’s bloated construction sector into more socially useful activities than piling more new projects onto more years of overbuilding. (what International Monetary Fund economist Yuanchen Yang and I warned about in 2020). Perhaps Chinese leaders know something their Western counterparts don’t about the urgency of preparing for the next pandemic, in which case quarantine centers might seem positively visionary. More likely, however, China is turning to the windmills in an attempt to tame the increasingly contagious virus, in which case the centers will prove to be a vast waste of resources and unnecessary closures.
The risk of a US recession has certainly increased, with the main uncertainties now being its timing and severity. The optimistic view that inflation will come down significantly on its own, and therefore the Fed won’t have to raise interest rates too much, looks more dubious every day. With savings having soared during the pandemic, the most likely scenario is that consumer demand will remain strong, while supply chain issues worsen further.
Yes, the US government seems to be reducing its stimulus policies, but this will increase recession fears even if it helps to dampen inflation somewhat. And if stimulus programs continue at full steam – and, in an election year, why shouldn’t they? – it will make the Fed’s job even more difficult.
As for Europe, the backlash from economic slowdowns in China and the United States would have threatened its growth even without the war in Ukraine. But the war has greatly amplified Europe’s risks and vulnerabilities. Growth is already weak. If Russian President Vladimir Putin resorts to the use of chemical or tactical nuclear weapons, Europe will be forced to decisively cut the cord, with uncertain consequences for its economy and the risk of further escalation. which could mean imposing 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 greatly in the event of a global recession. Even energy and food exporting countries, which so far have benefited economically from the war due to high prices, would likely have problems.
With luck, the risk of a synchronized global slowdown will fade by the end of 2022. But for now, the risks of recession in Europe, the United States and China are significant and increasing, and a collapse in one region will increase the risk of collapse. in others. Record inflation is not helping matters. I’m not sure politicians and policy makers are up to the task they may soon face.
Kenneth Rogoff is a professor of economics and public policy at Harvard University and was chief economist of the International Monetary Fund from 2001 to 2003.
© Syndicate Project