Risk of recession in Europe, US and China is
rising by the day
Kenneth
Rogoff
Threat of synchronised global downturn may recede by
late 2022 but collapse in one region will affect others
China is finding it difficult to sustain growth in the
face of Covid-19 lockdowns, with Shanghai already having been brought to a
halt.
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Thu 28 Apr
2022 07.00 BST
Is the
global economy flying into a perfect storm, with Europe, China, and the US all
entering downturns at the same time later this year? The risks of a global
recession trifecta are rising by the day.
A recession
in Europe is almost inevitable if the war in Ukraine escalates, and Germany,
which has been fiercely resisting calls to pull the plug on Russian oil and
gas, finally relents. China is finding it increasingly difficult to sustain
positive growth in the face of draconian Covid-19 lockdowns, which have already
brought Shanghai to a screeching halt and now threaten Beijing. In fact, the
Chinese economy may already be in recession. And with US consumer prices
currently increasing at their fastest rate in 40 years, prospects for a soft landing
for prices without a big hit to growth look increasingly remote.
Private and
official economic forecasts have recently started to highlight growing regional
risks but perhaps understate the extent to which they multiply each other.
Widespread lockdowns in China, for example, will wreak havoc with global supply
chains in the short run, raising inflation in the US and lowering demand in
Europe. Normally, these problems might be attenuated by lower commodity prices.
But with no clear end in sight in Ukraine, global food and energy prices are
likely to remain high in any scenario.
No amount
of careful macroeconomic stewardship can save the day if the Chinese leadership
has made the wrong call on Covid-19
A recession
in the US, especially if triggered by a cycle of interest rate rises by the
Federal Reserve, would curtail global import demand and trigger chaos in
financial markets. And although recessions in Europe normally radiate globally
mainly through reduced demand, a war-induced slowdown could radically shake
business confidence and financial markets worldwide.
How likely
is each of these events? China’s growth trajectory has long been slowing, with
only a combination of luck and mostly competent macroeconomic management
preventing a severe downturn. But no amount of careful macroeconomic
stewardship can save the day if the Chinese leadership has made the wrong call
on Covid-19.
Most Asian
countries have now exited zero-Covid strategies and are moving on to regimes
that manage Covid-19 as an endemic threat but do not treat it as a pandemic.
Not China. There, the government is spending massive sums to convert empty
downtown office buildings into quarantine centres.
Perhaps the
new quarantine centres are a brilliant idea, providing a way to redirect
China’s bloated construction sector toward more socially useful activities than
piling more new projects on top of years of overbuilding (something that the
International Monetary Fund economist Yuanchen Yang and I warned of in 2020).
Perhaps China’s leaders know something their western counterparts don’t about
the urgency of preparing for the next pandemic, in which case the quarantine
centres could look positively visionary. More likely, however, China is tilting
at windmills in trying to tame the increasingly contagious virus, in which case
the centres will prove to be a vast waste of resources, and the lockdowns
futile.
A US recession, especially if triggered by a cycle of
interest rate rises by the Fed, would curtail global import demand and lead to
chaos in the markets.
The risk of
a US recession has surely soared, with the main uncertainties now being its
timing and severity. The sanguine view that inflation will decline
significantly on its own, and that the Fed will therefore not have to raise
interest rates too much, is looking more dubious by the day. With savings
having soared during the pandemic, the more likely scenario is that consumer
demand will remain strong, while supply chain problems become even worse.
True, the
US government appears to be scaling down its stimulus policies, but that will
increase recession concerns even if it helps mitigate inflation somewhat. And
if stimulus programmes continue full throttle – and, in an election year, why
would they not? – it will make the Fed’s job even tougher.
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As for
Europe, blowback from economic slowdowns in China and the US would have
threatened its growth even without the war in Ukraine. But the war has greatly
amplified Europe’s risks and vulnerabilities. Growth is already weak. If the
Russian president, Vladimir Putin, resorts to using chemical or tactical
nuclear weapons, Europe will be forced to cut the cord decisively, with
uncertain consequences for its economy and the risk of further escalation,
which might mean imposing sanctions on China as well. Meanwhile, European
governments are under considerable pressure to increase significantly their
spending on national defence.
Clearly,
emerging markets and poorer developing economies will suffer mightily in the
event of a global recession. Even energy and food-exporting countries, which
until now have benefited economically from the war because of high prices,
would probably have problems.
With luck,
the risk of a synchronised global downturn will recede by late 2022. But for
the moment, the odds of recession in Europe, the US, and China are significant
and increasing, and a collapse in one region will raise the odds of collapse in
the others. Record-high inflation does not make things any easier. I am not
sure politicians and policymakers are up to the task they may soon confront.
Kenneth Rogoff is professor of economics and
public policy at Harvard University and was the chief economist of the International
Monetary Fund from 2001 to 2003
© Project Syndicate
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