Another global crash on the horizon as the world’s economic engines sputter

The rapidly deteriorating state of the global economy suggests that a hard landing in the form of a recession or crash is all but certain
China and other emerging economies might have to carry the load of sustaining growth, but government budgets are stretched fighting the pandemic and inflation

Anthony Rowley

Published: 3:15pm, 31 Jul 2022

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“Mayday, mayday. Three engines are failing and the fourth is misfiring. We are losing speed and altitude fast and heading for a hard landing.” An SOS like this might suggest an aircraft about to plunge to its doom, but, in fact, it describes the plight of a global economy in severe distress.

While not using those exact words, this is the gist of what the International Monetary Fund (IMF) says in its latest World Economic Outlook about the rapidly deteriorating state of the global economy. The hard landing is all but certain to be an economic recession or even a crash.

The IMF has again downgraded global growth forecasts. Its baseline projection is for growth to slow from the 6.1 per cent seen last year to just 3.2 per cent in 2022 and then fall further next year to 2.9 per cent. The outlook, as the IMF says, is not just cloudy but is downright “gloomy”.

Among the world’s three largest economic engines, those of the United States and the euro zone are flaming out while China’s has lost thrust. Meanwhile, Japan’s is delivering little power. Yet, the world is reliant upon China and other emerging economies to keep the distressed aircraft flying.

Do those still-functioning engines have the power to do so? As the IMF says, “estimates of the probability of recession have increased,” so that is hardly a promising context. We will come back to this point, but first a few observations about the current situation.

The Asian financial crisis in 1997 was an event within Asia. Even so, a major contributing factor was the pressure Asian countries had come under to open their economies to foreign capital flows, thus rendering them vulnerable to external shocks.

Be that as it may, when the global financial crisis struck in 2008 – a product chiefly of speculation in US and other Western markets in subprime mortgages and other financial exotica – it was China and other emerging economies that supplied the growth needed to avoid global recession.

Rather than acknowledging the role of these emerging economies as new sources of global demand and investment, the US went on during the administration of president Donald Trump to launch a trade war against China and create protectionist barriers under the cover of economic security.

Trump’s successor, Joe Biden, has taken this further by targeting the supply chains that are vital to global demand and growth. On top of all this, the Biden administration and its allies have launched a barrage of criticism on everything from China’s Belt and Road Initiative to the country’s human rights practices and its military expansionism.

Where are we now as a result of all this? The answer is in a situation where those Western powers that have asserted the supremacy of their values find themselves dependent for continued economic growth upon nations which they endlessly criticise.

Sooner or later, this fact needs to be faced at the level of national policy in the US and its allies, for whom security concerns have triumphed over economic policy. Posturing will need to give way to pragmatic acceptance of mutual dependency.

The same applies to the situation Western powers find themselves in now regarding Russia’s invasion of Ukraine. Leaving aside issues of whether Nato provoked Moscow, it is undeniable that economic sanctions have not had the desired effect and the result is severe food and fuel crises.

But let’s get back to the IMF report and why, despite their resilience, China and Asia’s other emerging economies might be unable to recover to 5 per cent growth next year after dropping to a projected 4.6 per cent this year, as the IMF outlook suggests.

A worker sits in a truck delivering rice and vegetables to shops amid rampant food and fuel inflation in Colombo, Sri Lanka, on July 29. Photo: Reuters

Growth in emerging and developing Asia was revised downwards in the latest update to the IMF outlook, 0.8 percentage points lower than the 2022 forecast in April. This includes a 1.1 percentage point downgrade to growth in China to 3.3 per cent, the lowest growth in more than four decades.

It is hard to see why this contractionary trend should reverse. For a start, inflation is accelerating globally. The projection for global inflation in the latest IMF outlook is 8.3 per cent in 2022 – up from 6.9 per cent in the April outlook.

Asia has largely escaped the soaring inflation seen in the US and Europe, but prices are rising and that is partly because of the inflation-exporting effect of monetary excesses in Western economies. This is adversely affecting Asia through interest rates and capital flows.

As the IMF noted in a separate blog on the Asia-Pacific, “risks we highlighted in our April forecast – including tightening financial conditions associated with rising central bank interest rates in the United States and commodity prices surging because of the war in Ukraine – are materialising”.

Asian economies are being pushed to fight inflation. With increasing prices continuing to squeeze living standards, taming inflation should be the first priority for policymakers. Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them.

Fiscal support can help, but with government budgets stretched by the pandemic and the need for a disinflationary policy stance, such policies will need to be offset by increased taxes or lower government spending. Getting through this turbulence without a crash will be a tall order.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs