The global economy is in trouble not as a lone spy, but as a battalion. When setting U.S. monetary policy, the Federal Reserve should take these issues into account if the U.S. economy wants to avoid an unnecessarily hard economic landing.
Among the more systemic problems of the world’s economic problems are those emanating from China, the world’s second largest economy and, until recently, the world’s main economic growth engine. In response to his COVID-19 policy of zero tolerance by Chinese President Xi Jinping, major Chinese cities such as Shanghai and Beijing have been placed on lockdown. At times, as many as 350 million people were unable to work normally.
As a result, the Chinese economy came to a sudden halt. In his year, which ended in the second quarter of this year, China’s economy grew just 0.4%, well below the government’s 5.5% economic growth target.
Exacerbating China’s economic problems is the deepening crisis in the real estate sector. The sector accounts for almost 30% of the country’s economy and around 70% of household wealth. After years of rapid expansion, it’s not just that about 30 highly leveraged Chinese property developers are now defaulting on their loan obligations. Home prices have now fallen for the 11th straight month, with more than 65 million vacant homes in China and more than 1 million Chinese householders who have declared a boycott of mortgage payments.
Despite deep-rooted problems in the real estate sector, the Chinese government’s control over the country’s banking system makes it unlikely that the US-style housing market will collapse in 2007. Rather, China is now likely to experience her decade of lost economies, as Japan experienced before. It will because the banking system backs zombie property developers with tons of credit. As such, a strong early recovery for the Chinese economy is unlikely.
Another dark cloud over the global economy is Russian President Vladimir Putin’s threat to halt Russian natural gas exports to major European countries such as Germany and Italy. He will do so to pressure them to stop supporting Ukraine in a war with Russia Already Putin has cut Russia’s natural gas exports to 20% of his is trying not to build up inventory before winter. This is a major concern given that Russian gas imports supply almost 50% of German and Italian gas demand.
A recent International Monetary Fund (IMF) report estimated that a total moratorium on Russian energy exports could cut Germany’s GDP by 1.5% in 2022 and 2.75% in 2023. , the German economy could plunge into a deep recession. A German recession is the last thing Europe needs at a time when renewed Italian political instability calls into question Italy’s ability to repay its mountain of public debt.
A strong repatriation of capital from emerging market countries is adding to the dark clouds in the global economy following the Federal Reserve’s interest rate hikes. This could trigger a wave of defaults in emerging market countries that currently maintain record debt levels. Highlighting the potential for such a wave are the severe economic difficulties currently being experienced in Argentina, Egypt, Pakistan, Russia, Sri Lanka and Ukraine.
For the US, all of this could mean further downward inflationary pressure against the backdrop of a stronger dollar and continued declines in international commodity prices. It could also mean weaker aggregate demand as a result of weaker export markets and lower risk appetite. These deflationary forces raise serious questions about whether the Federal Reserve is being overly aggressive in controlling inflation and raising the risk of an unnecessarily hard economic landing. I’m here.
Desmond Lachman is a Senior Fellow at the American Enterprise Institute. He was previously Deputy Director of Policy Development and Review at the International Monetary Fund and Chief Emerging Markets Strategist at Solomon Smith Barney.