The global economy heads into the final quarter of 2021 with an increasing number of headwinds threatening to slow the recovery from the pandemic recession and proving policymakers’ benevolent views on inflation to be false.
The expanding delta variant continues to disrupt schools and workplaces. US lawmakers argue over the debt ceiling and spending plans. China suffers from an energy crisis and has crackdowns while markets remain tense as Chinese company Evergrande Group struggles to survive.
Fuel and food costs are skyrocketing around the world, combined with congested ports and tight supply chains to put pressure on prices. Labor shortages continue to plague some employers.
While expansion appears intact, such a backdrop fuels fears of a mix of weaker growth and faster inflation, and threatens to complicate emerging central banks’ efforts to cut incentives without shaking markets.
“Expectations of a quick exit from the pandemic were always out of place,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings in Hong Kong. “Full recovery is measured in years, not quarters.”
Here is a breakdown of the main risks:
China’s energy problems have forced manufacturers to cut production and economists to cut their growth forecasts. Bloomberg Economics predicts the power shortage will have the biggest impact on expansion since a nationwide lockdown when the pandemic first broke out.
Regions affected by the restrictions make up about two-thirds of the economy and include the five largest provinces in terms of gross domestic product – Guangdong, Jiangsu, Shandong, Zhejiang, and Henan. As a sign of what’s to come, factory activity declined in September for the first time since the pandemic began.
This adds to the burden of the crisis affecting Evergrande, the world’s most indebted property developer, and a wider slowdown in the all-important housing sector. President Xi Jinping’s push for stricter regulations on industries, including technology, is also unsettling investors.
More expensive food and energy
China’s energy problems could also spur global agri-food prices up again as the country faces a difficult harvest season for products such as corn, soy, peanuts and cotton. Last year, Beijing imported a record amount of agricultural produce due to a domestic shortage that drove prices and global food costs to multi-year highs.
A United Nations index has risen 33% in the past 12 months. At the same time, some gas, coal, CO2 and electricity benchmarks are breaking records.
Oil prices rose above $ 80 a barrel for the first time in three years, and natural gas is the most expensive in seven years, which helped push the Bloomberg Commodity Spot Index to its highest level in a year. TotalEnergies CEO Patrick Pouyanne said the gas crisis affecting Europe is likely to last all winter.
It could get worse. Bank of America analysts tell their customers there is a chance the oil will hit the $ 100 mark, causing an economic crisis.
As winter approaches in the northern hemisphere, the delta variant remains another concern.
This explains why congestion forms at key international trade junctions, including the ports in Shanghai and Los Angeles, train stations in Chicago and warehouses in the UK.
Retailers, including Costco Wholesale Corp. in the US, order everything to make sure shelves are full, especially for those year-end holiday shopping.
Manufacturers, meanwhile, are struggling to source critical parts like semiconductors, chemicals, and glass.
Dubai’s DP World, one of the largest global port operators, expects bottlenecks that rocked global trade flows to last at least two years.
There is also a shortage of labor in some industries. Next week’s US payroll report sheds light on how big the problem was for businesses in September.
Gloss also assumes that US economic policy is the locomotive for global recovery. While President Biden prevented a disruptive shutdown of the federal government for the time being through a stopgap funding bill, the broken talks on his $ 4 trillion economic agenda continue with deep divisions among his Democrats on the way forward.
The compromise on the shutdown came after Treasury Secretary Janet L. Yellen warned that unless Congress suspends or increases the sovereign debt limit, her department will indeed run out of money by October 18. Failure to do so would trigger both a recession and a financial crisis, Yellen said.
Globally, fiscal support will slow until 2022 after governments incurred the largest debt since the 1970s.
Biden and Yellen also have to decide whether to hand over a second term to Federal Reserve Chairman Jerome H. Powell, a decision that could also shake markets.
For Powell and his international colleagues, the combination of declining growth and persistent inflation is challenging.
On Friday alone, there was news of the fastest inflation in the euro area in 13 years, and a US reading rose the most year-on-year since 1991.
Powell and the President of the European Central Bank, Christine Lagarde, express cautious optimism for the time being that inflation will ease. But economists wonder when the ephemeral will become more permanent.
And that makes plans to cut bond purchases or raise interest rates risky. Many Latin American central banks and some in Eastern Europe have already increased the cost of borrowing. Norway was just the first developed country to do this, and the Fed is signaling that it will cut its bond-buying program as early as November.
Deutsche Bank strategist Jim Reid assumes that the global economy is facing its most restrictive phase of monetary policy in a decade.
“Central banks are playing with fire by tapering to stave off inflationary pressures without being entirely sure where we are in the cycle,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis.