At the end of July, the International Monetary Fund (IMF) once again lowered its forecast for global economic growth this year and next to 3.2% and 2.9% respectively. At the same time, it warned that the world economy will face downside risks in the future. If risks such as the escalation of the Russian-Ukrainian war, high inflation expectations, and tightening of the global financing environment become a reality, the global economic growth rate is expected to further drop to 2.6% and 2.0%. In this scenario, both the US and the euro zone will see near-zero economic growth next year, which will have negative knock-on effects elsewhere.
There are six major headwinds affecting the recovery of the world economy. If these six major risks are allowed to spread, the IMF's prediction may be fulfilled.
The first is aggressive monetary tightening in advanced economies. Currently, most advanced economies, with the exception of Japan, are suffering from high inflation once in decades. The Federal Reserve has raised interest rates four times in a row since March this year, just approaching the neutral rate level. In the first and second quarters, the U.S. economy experienced consecutive negative growth month-on-month, falling into a technical recession. At the end of August, the White House had revised down its economic growth forecast for this year to 1.4% from 3.8% in March. At the recent Jackson Hole annual meeting, Federal Reserve Chairman Powell made it clear that although inflation fell in July, it is too early to give up; learning from the lessons of premature policy easing in history, the Federal Reserve needs to maintain restrictions for a period of time stance on monetary policy, even if it could lead to slower economic growth and a weaker job market. In July, due to high inflation, the European Central Bank raised interest rates for the first time in 11 years, raising interest rates by 50bp at a time, ending the era of negative interest rates for eight years; at the next meeting, it will discuss whether to raise interest rates by 50bp or 75bp, although the European locomotive—— The German economy has shown signs of stagnation in the second quarter.
Second, the impact of the escalation of the Russian-Ukrainian war has spread. The Russian-Ukrainian war and the Western joint sanctions against Russia have further hindered the repair of the global supply chain and aggravated the supply-side shock. Rising prices for commodities such as energy and food are making global inflation more stubborn, while potentially triggering widespread global energy and food security issues and social unrest. In particular, Europe is heavily dependent on Russia for energy. If economic sanctions against Russia are escalated, it may exacerbate the European energy crisis, further push up inflation, curb European growth, and even tighten financial conditions and increase financial stability risks. To this end, the European Commission lowered its forecast for growth in the euro zone to 2.6% this year from 2.7% last year, and to 1.4% next year from 2.3%. While aggressively buying up European natural gas futures and power futures, aggressively shorting the euro and European stock indexes has become a common strategy for Wall Street hedge funds.
The third is the continuous impact of the new crown pneumonia epidemic. Although the severe and lethal rate of the mutant strain of Omicron is low, it is highly insidious and highly infectious, and continues to interfere with the operation of the global economy. Even in countries that have unblocked and coexisted with the virus, the epidemic still affects the recovery of local people flow, logistics and service industries, and there is still a relatively broad basis for the spread of inflation from goods to services. The scarring effect of the epidemic has inhibited the recovery of the labor force participation rate, superimposed on the aging of the population, and exacerbated the labor supply tension.
Fourth, vulnerable emerging economies continue to be under pressure. According to the latest IMF forecast, global inflation is expected to be 8.3% this year, of which developed economies will reach 6.6% and emerging market and developing economies will reach 9.5%, and are expected to remain high for a longer period of time. The return of high global inflation, the catch-up tightening of currencies in developed economies, the sharp rise in interest rates and the tightening of the financing environment have increased the pressure on emerging economies from capital outflows and exchange rate depreciation. According to the IMF, currently 60% of low-income countries may have debt risks, and 30% of emerging market countries have experienced or are close to having a debt crisis. The "storm" of the "economic + debt" dual crisis in fragile emerging economies is imminent.
Fifth, the policy space of major countries is narrow. Due to poor medical and health conditions and limited space for macroeconomic policies, emerging economies have been hit hard by the epidemic, and their economic recovery as a whole lags behind. The situation in advanced economies is not optimistic either. After several rounds of flooding since the global financial crisis in 2008, its fiscal and monetary stimulus has basically been used to the extreme, and now it is generally burdened with the "three mountains" of high prices, high debt and high asset prices. In the process of stabilizing prices, how to prevent the debt and asset bubbles from being actively pierced is a challenge that Volcker, then the chairman of the Federal Reserve in the 1970s and 1980s, never experienced. At a press conference after the interest rate meeting in July, Powell admitted that the road to a soft landing for the U.S. economy is getting narrower. If prices have not fallen, but stock prices plummet and an economic recession occurs, it will test the adequacy and effectiveness of the policy toolbox of advanced economies.
Sixth, the mutual trust and cooperation between major countries has been seriously damaged. In today's global integration, any crisis will be global, and no country can stay out of it. In response to the crisis in 2008, the G20 became famous as a model of cooperation between major powers and North-South cooperation. However, in order to maintain their own dominance, some major powers put pressure on the development limit of other countries, partially promote the decoupling of economy and technology, intervene in the layout of industrial chains and supply chains, abuse sanctions, provoke geopolitical conflicts, and also form factions. Factionalization and antagonism. This hinders global trade and cooperation, increases inflation resilience, affects investment and consumer confidence, and greatly reduces the international coordination capacity for global risk management and crisis response.
Global economic growth rebounded to 6.1% last year, but the economy of nearly half of the countries still has not recovered to the level of 2019, and the two-year compound average growth rate of nearly 90% of the countries is lower than the five-year trend value before the epidemic. If the above-mentioned risks do not converge but diverge, the already weak world economy may slide into recession. China must seize the time window and effectively expand domestic demand to cope with the challenges of external uncertainties.
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