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Residents walk through a reopened shopping mall in Beijing on May 29, as restrictions imposed following a Covid-19 outbreak in late April are gradually lifted. Photo: AP
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

Recession fears are growing, but the global growth outlook isn’t all bad

  • Pessimism over GDP growth has not given way to hysteria yet, with PMI surveys showing that business activity remains healthy
  • As long as policymakers don’t go overboard with tightening, conditions suggest a soft landing is likely
David Brown
David Brown
Why you can trust SCMP
Storm clouds have been gathering for quite a while, headwinds continue to build and global economic confidence is being badly buffeted. The hangover effects from the Covid-19 pandemic and the fallout from the war in Ukraine have taken their toll on global recovery prospects, and it’s no wonder fears about an imminent recession are rising.

It’s early days, but there are signs of light at the end of the tunnel. Global manufacturing surveys are still operating in positive territory and, despite growing pessimism for a major stock market meltdown, investor sentiment seems to be holding at reasonably firm levels.

There may be greater risks in some regions, but there’s a reasonable chance we’ll be spared a worldwide recession. Global policy settings remain extremely loose and policymakers are unlikely to risk a deeper downturn for the sake of an overzealous squeeze on inflation. Steady nerves will be needed in the second half of 2022, but the world should be on a surer footing by 2023.

Right now though, the pandemic and the Ukraine conflict are both taking a heavy toll on expectations. The Organisation for Economic Co-operation and Development has taken a much dimmer view of global GDP growth prospects in its June Economic Outlook, downgrading its 2022 forecast to 3 per cent, from 4.5 per cent in December.
Mathias Cormann, secretary general of the Organisation for Economic Co-operation and Development, attends the OECD Economic Outlook at the grouping’s headquarters in Paris on June 8. Photo: AFP
The sharp revision reflects rising geopolitical tensions, the oil price shock, the inflationary overhang due to pandemic-related supply chain disruptions, and the expected tightening in global monetary conditions. Some critics might argue that the growth downgrades could go further.

However, recent global manufacturing survey numbers suggest the outlook is not quite as grim as the pessimists believe. The latest purchasing managers index (PMI) for global manufacturing from S&P Global and JP Morgan seems to have steadied at 52.4 for May, down from the post-pandemic peak of 56 in May last year, but still holding reasonably well above the critical 50 boom-or-bust line.

That’s still consistent with expanding business activity in the global factory sector despite the recent market gloom. And it’s also in line with indications from the global service sector PMI, which is slightly lower at 52.2 for May, unchanged from April, and shows no sign of significant capitulation. Overall, it seems more symptomatic of a soft landing than a recession.

The outlook might seem mixed among the major economies, but there are still reasons to be optimistic. The US Institute for Supply Management manufacturing PMI stands at 57 for May, well inside positive growth territory, suggesting that the US economy is doing better than expected.

China’s official manufacturing PMI from the National Bureau of Statistics hit 49.6 in May, reflecting the recent easing of Covid-19 restrictions in several major cities which should help pave the way for a rebound in mainland business confidence and help strengthen consumer optimism.

Even the euro-zone economy, which is more affected by uncertainty over the Ukraine conflict given the geographical proximity, is still showing a positive manufacturing PMI reading of 54.6 in May, despite falling from a peak of 63.4 last June.

There are no imminent signs of a catastrophic collapse in global economic confidence. Much depends on how policymakers respond to the latest spike in global energy prices and how big a threat it might pose to the longer-term inflation picture.

Inflation isn’t scary. Central bankers getting militant about it is

While the latest rise in US consumer prices has pushed America’s inflation rate to 8.6 per cent in May, its highest level in over four decades, the Federal Reserve is unlikely to go overboard in its policy response, with market expectations that the Fed funds rate will peak at just over 3.5 per cent in the next one-to-two years.

The European Central Bank has just given the green light for gradual tightening from next month, while China might surprise with another short-term rate cut to help recovery prospects.

With all the obstacles in the way of a faster recovery, the last thing the global economy needs is a short, sharp interest rate shock. There’s no need for panic; it’s in the world’s interest to achieve a soft landing and that means monetary gradualism must prevail.

David Brown is the chief executive of New View Economics

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