Is a global recession coming? In the United States, risks linked to China are increasing | Business and economy

Could the world be heading for another recession?

As the global economy recovers from the COVID-19 pandemic, a growing list of risks is clouding the economic outlook – although most economists still think a recession this year is relatively unlikely.

The war in Ukraine, sanctions imposed by Russia, China’s zero-COVID policies, soaring inflation and US Federal Reserve interest hikes are all expected to dampen growth in 2022.

The question is whether deteriorating conditions and ill-advised policy choices could tip the global economy from a slowdown to a contraction.

“Recessions are incredibly difficult to predict, and even good forecasters, for example the Fed, don’t know that we only experience a recession once we’re there, not in advance,” said Tara Sinclair, professor in economics at George Washington University in Washington. , DC, told Al Jazeera.

“In general, policymakers underweight recessions in their forecasts and focus on forecasting the economy in normal times.”

The US Federal Reserve faces the delicate task of calming inflation without causing a recession [File: Ting Shen/Bloomberg]

In the United States, the Federal Reserve faces the delicate task of calming inflation, which is at its highest level in four decades, without raising rates so sharply that it causes a recession. Historically, the central bank has struggled to achieve such “soft landings” – most economists argue it only did so once, in 1994, when then-President Alan Greenspan, oversaw a doubling of the benchmark rate without killing economic growth.

A slowdown in the world’s largest economy, which recorded its fastest expansion in decades last year, would reverberate globally, threatening to reverse growth just two years after the global economy fell by 4.3% due to the pandemic.

In an op-ed last month, Bill Dudley, the former president of the Federal Reserve Bank of New York, warned that a recession was now “virtually inevitable” because the Federal Reserve had waited too long to tighten policy.

U.S. Fed Chairman Jerome Powell, who is expected to oversee at least six more rate hikes this year after a quarter-percentage-point hike last month, insisted the central bank may “more likely unlikely” achieve a soft landing.

Another warning sign in recent weeks has been the inversion of the yield curve for short and long-term US Treasuries – an indication that investors are becoming pessimistic about the short-term outlook for the economy. .

An inverted yield curve, which occurs when investors shift from stocks to less risky bonds, has preceded all eight U.S. recessions since 1955, although the time lags between an inversion and a downturn have varied between months and years.

“Real risk”

Campbell R Harvey, who pioneered the use of the yield curve to predict recessions, told Al Jazeera that the curve is not currently pointing to a contraction because it has not been inverted for at least a year. full quarter.

Still, Harvey said there is a real risk of a recession and he agrees with critics who say the Fed has been too slow to act on inflation.

“They have a very difficult problem,” said Harvey, a professor at Duke University’s Fuqua School of Business. “And did they leave it too late?” Yes. Do they regret all the QE [quantitative easing] what did they do? Yes.”

“Is this a real risk? Obviously, it is.

For now, economists seem more optimistic about the US economy than the general public.

In a poll conducted for CNBC last month, 81% of American adults said they thought a recession was likely in 2022.

By contrast, Goldman Sachs economists recently put the probability of a US recession next year at 20-35%.

“The Biden infrastructure stimulus will kick in,” Tim Harcourt, chief economist at the Institute for Public Policy and Governance at the University of Technology Sydney, told Al Jazeera. “It may not save the Democrats in the medium term, but it might save the economy. China’s economy will be hit by the new Shanghai shutdown.

Although economies have weathered the war in Ukraine and sanctions against Russia relatively well so far, the possibility of escalation and more punitive measures remains a risk factor in the months ahead.

While Europe has resisted sanctions on Russian energy, focusing only on coal so far, there are growing calls to extend restrictions to gas and oil, which account for 40% and a third of supplies respectively. from the continent.

European Council President Charles Michel told the European Parliament on Wednesday that he believed measures targeting oil and gas would be needed “sooner or later”, a move that could push energy prices further up. .

Shanghai deserted under confinement
China’s ultra-tight lockdowns are dampening domestic demand and worsening supply chain disruptions [File: Qilai Shen/Bloomberg] (Bloomberg)

China’s continued efforts to stamp out the spread of COVID-19 with lockdowns and ultra-tight border controls, meanwhile, are dampening domestic consumption and worsening disruptions to global trade amid the country’s worst outbreak yet. this day.

In Shanghai, which contains the world’s busiest container port and has been stuck for more than two weeks, hundreds of ships seeking to unload their cargo have been stuck in queues in recent weeks.

Carsten Holz, a Chinese economics expert at the Hong Kong University of Science and Technology, told Al Jazeera that China is unlikely to meet its 5.5% growth target for this year.

“Given that the People’s Republic of China is currently unlikely to easily return to a zero COVID case scenario, supply chains will continue to be affected, leading to price increases, which will in turn contribute to pressure on Western central banks to raise interest rates,” Holz told Al Jazeera.

“Whether interest rate hikes in the West lead to a recession largely depends on demand, which appears to remain strong, particularly due to pent-up demand following COVID restrictions now lifted in the West. A wage-price spiral seems more likely than a recession. This does not mean that a bubble cannot burst, whether it is a stock market bubble or a real estate bubble, a risk always present since what constitutes a bubble can only be determined after the fact. , after a sharp decline in a values ​​has occurred.”

Nevertheless, economic forecasts for the Asia-Pacific region remain generally optimistic.

In its latest economic outlook released on Wednesday, the Asian Development Bank estimated that developing economies in Asia will grow 5.2% in 2022 and 5.3% in 2023, down slightly from previous forecasts.

Trinh Nguyen, senior Asia economist at Natixis in Hong Kong, told Al Jazeera that a global recession is still “unlikely” in 2022.

“The good news for Asia is that we have rather low real rates and normalization of business, except for China with the zero COVID policy,” Nguyen said. “This should help us weather the economic storm. However, the rise in commodity prices, the tightening of financial conditions due to the rise in the dollar and rates, and the slowdown in China are dampening the momentum, in particular for the most exposed countries.

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