The new fault lines on which the global economy rests
TIT PANDEMIC caused a dreadful economic slump, but now a strange and exhilarating boom in full swing. The price of oil has skyrocketed, as restaurants and transport companies have to fight and flatter to recruit staff. As listed companies report profits will hit an all-time high this year, stock markets are in tears. An index produced by JPMorgan Chase and IHS Markit suggests that global growth is at its highest since the exuberant days of 2006.
Any escape from covid-19 is cause for celebration. But today’s booming economy is also a source of anxiety, as three fault lines lurk beneath the surface. Together, they will determine who is thriving and if the most unusual restoration of living memory can be sustained.
The first fault line separates the jabs from the jab-nots. Only countries that are vaccinated in arms will be able to tame covid-19. This is the condition for shops, bars and offices to reopen for good, and for customers and workers to have the confidence to leave their homes. But only one in four people in the world have received a first dose of the vaccine and only one in eight is fully protected. Even in America, some under-vaccinated states are vulnerable to the infectious Delta variant of the virus.
The second fault line runs between supply and demand. Microchip shortages have disrupted the manufacturing of electronics and cars just as consumers want to binge on them. The cost of shipping goods from China to ports on the west coast of the United States has quadrupled from its pre-pandemic level. Even if these bottlenecks are unblocked, the newly opened economies will create new imbalances. In some countries, people seem more inclined to go out for a drink than to work behind a bar, causing a structural labor shortage in the service sector. House prices have jumped, suggesting that rents will soon start to rise as well. This could support inflation and deepen the perception that housing is unaffordable.
The last fault line concerns the withdrawal of the stimulus. At some point, the state interventions that started last year must be reversed. Rich world’s central banks have bought more than $ 10 billion worth of assets since the start of the pandemic and are nervously considering how to get out of it without causing capital markets to collapse by tightening too much quickly. China, whose economy did not contract in 2020, offers a sign of the future: it has tightened its credit policy this year, slowing its growth.
Meanwhile, emergency government assistance programs, such as UI top-ups and eviction moratoria, are starting to expire. Households are unlikely to receive a further injection of ‘stimuli’ in 2022. Deficits will contract rather than widen, which will hold back growth. So far, economies have largely avoided a wave of damaging bankruptcies, but no one knows how well companies will fare once emergency loans are due and workers can no longer be put on leave at the expense of workers. taxpayers.
You might think that an event as extreme as a pandemic, combined with the government’s unprecedented response, would end up triggering an equally extreme global economic response. Pessimists worry about a return to 1970s inflation, or a financial crash, or that the underlying energy of capitalism is being drained by state handouts. Such doomsday results are possible, but they are not likely. Instead, a better way to think about the unusual outlook is to examine how the three fault lines interact differently in different economies.
Start with America. With plentiful vaccines and enormous stimuli, he is at the greatest risk of overheating. In recent months, inflation has reached levels not seen since the early 1980s. Its labor market is strained as economic activity evolves. Even after an 850,000 increase in jobs in June and abundant vacancies, the number of people working in leisure and hospitality is 12% lower than before the pandemic. Workers are reluctant to return to the industry, which has pushed up wages. Hourly wages are almost 8% higher than in February 2020. Perhaps they will return when emergency unemployment benefits expire in September. But countries without such a program, like Australia, are also experiencing a labor shortage. Attitudes towards work can change at the bottom of the income ladder, among waiters and cleaners, not just among well-heeled professionals who dream of yachts and sabbaticals. All of this suggests that the US economy will heat up, with continued pressure on the Federal Reserve to tighten policy.
Elsewhere in the rich world, the picture is less exuberant. It includes a few jab-nots, such as Japan, which has fully vaccinated less than 15% of its population. Europe is catching up on vaccines, but its lesser stimulus means inflation has not reached US levels. In Great Britain, France and Switzerland, 8 to 13% of employees were on leave at the end of May. In all of these economies, the risk is that policymakers overreact to imported temporary inflation, withdrawing support too quickly. If so, their economies will suffer, just as the euro area suffered after the 2007-09 financial crisis.
Low- and middle-income countries are at an impasse. They should benefit from strong global demand for raw materials and industrial products, but they are struggling. Indonesia, grappling with another wave of covid-19, is redeploying oxygen from industry to hospitals. By 2021, the poorest countries, which are sorely lacking in vaccines, are expected to grow more slowly than rich countries for the third time in just 25 years.
Even as covid-19 weakens their recovery, emerging markets face the prospect of a Fed interest rate hike. This tends to put downward pressure on their currencies as investors buy dollars, increasing the risk of financial instability. Their central banks don’t have the luxury of ignoring temporary or imported inflation. Brazil, Mexico and Russia have recently raised interest rates, and other places may follow. The combination of bites too late and tightening too early will be painful.
Prepare to shelter
The business cycle has been hectic, leaving the doldrums far behind in just one year. Perhaps by the summer of 2022 most people will be vaccinated, businesses will have adjusted to new demand patterns, and the stimulus will run in an orderly fashion. In this weird boom, however, beware of those fault lines. ■
Central banks face a daunting task: drying up without a crisis (July 2021)
Surprising Inflation Levels Increasingly Due to Wages, Not Goods (July 2021)
This article appeared in the Leaders section of the print edition under the title “Fault Lines in the Global Economy”