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The simultaneous slowdown of three major economies casts a global shadow

The IMF warns about concurrent downturns in the US, Europe and China

Álvaro Sánchez
Evergrande apartment buildings under construction in Beijing.
Evergrande apartment buildings under construction in Beijing.Guillermo Abril

The three tenors all have sore throats, and while the consonant voice of the global economy is quavering, a quick recovery is expected. If the world’s major economies actually enter into recession, no one expects it to be particularly deep or long-lasting because labor markets are healthy and inflation rates are stabilizing. Still there is concern about concurrent downturns in the United States, Europe and China, a scenario that recently prompted the International Monetary Fund (IMF) to issue a warning. In an interview with US-based news network CBS, IMF Managing Director Kristalina Georgieva, pointed to “a simultaneous slowdown” in growth in the three economies, which will cause one-third of the world’s economies to enter into a recession in 2023.

British economist Charles Goodhart, a senior Bank of England official for nearly two decades, is also pessimistic about the impacts of concurrent economic downturns. “If it happens, there will be significant spillover effects on the rest of the world, which will experience slower growth, more unemployment, and lower income and consumption. In short – more unhappiness.” Goodhart has identified several different causes of the slowdown. “In China, it’s the poor management of the Covid-19 epidemic; in the US, it’s the consequence of excessive fiscal and monetary expansion; and in the EU, it’s the supply shock caused by the war in Ukraine.”

The three major economies are currently at different starting points. The US is suffering from very aggressive interest rate hikes by the Federal Reserve, but is also close to full employment. It currently only has 3.7% unemployment, and is benefitting from high energy prices for its oil and gas exports. Inflation has dropped from 9.1% in June to 7.1% in December. In Europe, it’s all about Putin’s war and the region’s energy dependence. Meanwhile, China’s controversial pandemic containment policies could cause economic growth in 2022 to fall below the global average for the first time in the 40 years.

Roland Gillet is a professor of financial economics at the Sorbonne University in Paris and the Université Libre in Brussels who can sum up the situation of each economic power in one word. For China, its uncertainty because two opposing forces are colliding. There’s a tsunami of Covid-19 infections versus an economy that has finally been freed from its zero-Covid policy straitjacket. On the plus side, Gillet points to China’s favorable oil purchase deals with Russia after Western customers abandoned Putin, and the low inflation rate of 1.6% reported in November.

Gillet’s words for Europe and the US are fragile and resilient, respectively. “Europe is getting poorer with every passing day compared to the United States, because the US produces its own energy. All the money saved by Europeans during the pandemic is being used to pay for heating and fuel instead of at restaurants and stores. Money spent on energy goes to foreign suppliers and does nothing for Europe’s growth. This doesn’t happen in the US.” Just two American oil companies – Exxon Mobil and Chevron – are expected to make a combined profit of around $100 billion in 2022.

Lorenzo Codogno, an Italian economist and former Treasury Minister, believes that China’s reopening might benefit its economy, but is concerned about the risks of new lockdowns and the emergence of unknown coronavirus variants. Codogno is cautiously optimistic about the major economies in 2023. “The good news is that, barring a new shock, a potential recession is unlikely to be very profound or long-lasting. There is much resilience in the system from public and private investment, private savings, the ongoing recovery of demand for services and the strong labor market.”

Real estate risk

Blaring headlines about simultaneous economic slowdowns tend to obscure some important nuances. The Covid-19 explosion in China after it abruptly abandoned its zero-Covid policy could crush its health care system and further cripple production in the “world’s factory.” These two factors have already caused sharp drops in global oil prices due to lower Chinese demand. Nevertheless, Ignacio de la Torre, chief economist at Arcano Research, says that most forecasts still indicate robust GDP growth for China. “Georgieva’s statement isn’t entirely consistent. In fact, the market is betting on higher Chinese growth in 2023, and expects it to rise from 3% to 5%,” said de la Torre. Some major US financial institutions agree with de la Torre. Morgan Stanley raised its forecast for China’s GDP in 2023 from 5% to 5.4%, and JP Morgan raised its forecast from 4% to 4.3%.

Despite these optimistic GDP forecasts for China, Ignacio de la Torre has identified some major risks for the country. “Three things could converge and cause a crisis in China: undue optimism in the real estate sector, excessive leverage, and illiquidity. There are too many assets in illiquid real estate.” The crisis at Chinese real estate giant Evergrande may have been the most heavily publicized warning sign, but price correction in the real estate sector has already cut deeply. “The bomb has already exploded. It’s very reminiscent of Spain’s situation in 2008, when people were still in denial, starting with the nation’s top public official for the economy,” said de la Torre, who remains concerned about China’s deteriorating public health situation due to the lower vaccine effectiveness, the high percentage of elderly people who haven’t received booster doses, and reduced hospitals and health center capacity. As for Europe and the US, de la Torres said, “In the second half of 2023, inflation will rise more slowly than wages in the West, resulting in more consumption and growth. The West does not display the systemic risks that people are seeing in China.”

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