The slowing of the Chinese economy, the threat of recession in Germany because of the shortage of Russian gas and the capital outflow from emerging markets are the harbingers of a global economic crisis. According to The Hill, if the US Federal Reserve wants to protect the US economy from a hard landing, it must take these problems into account when setting the country’s monetary policy.
Trouble comes to the global economy according to the saying “Trouble comes, open the gate”. Among the world’s most systemic economic problems are those emanating from China, the world’s second-largest economy and until recently the main engine of economic growth, The Hill writes.
As the piece continues, Chinese leader Xi Jinping has announced his intention to reduce the incidence of the coronavirus to zero – and major cities like Shanghai and Beijing have closed down for quarantine. As a result of this policy, up to 350 million people have dropped out of the labour market. As a result, the Chinese economy has stalled: in the fiscal year that ended in the second quarter of this year, China’s economy grew by only 0.4%, well below the government’s target of 5.5%.
China’s economic problems are exacerbated by a widening crisis in the real estate sector. The real estate sector accounts for almost 30% of the economy and up to 70% of household savings. Not only that, after years of rapid growth, some 30 highly leveraged Chinese property developers have defaulted on their loans. House prices have fallen for 11 months in a row, there are over 65 million unoccupied housing units, and over a million Chinese homeowners are boycotting their mortgage payments.
China is likely to face a lost economic decade like Japan before it, as the banking system fuels zombie property developers with big loans.
Another dark cloud hanging over the global economy is Vladimir Putin’s threat to cut off natural gas exports to major European countries like Germany and Italy. Putin has already cut Russian natural gas exports to 20% of the norm, which is a serious concern since Russian gas imports cover nearly half of Germany and Italy’s gas needs.
According to a recent report by the International Monetary Fund, a complete halt to energy exports from Russia would threaten to reduce German GDP by 1.5 percent in 2022 and 2.75 percent in 2023. The German economy is already stagnating and could slide into a deep economic recession if supplies cease, and a German recession is the last thing Europe needs at a time when renewed political instability in Italy is casting doubt on Rome’s ability to service its gigantic national debt.
Other reasons for global economic gloom include the massive repatriation of capital from emerging markets due to the US Federal Reserve’s interest rate hike. This is likely to lead to a wave of defaults in emerging markets and record debt levels. The severity of the economic difficulties in Argentina, Egypt, Pakistan, Russia, Sri Lanka and Ukraine indicate the likelihood of such a wave. As the author concludes, all of this will probably lead to further deflationary pressures in the US as the US dollar strengthens and world commodity prices continue to fall. And if the US Federal Reserve wants to prevent the economy from a hard landing, it must take these problems into account when determining the country’s monetary policy.