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Macroscope | Stagflation in Europe a bigger worry than China’s economic slowdown
- Like China, EU economies are struggling with sputtering growth. But they have one more headache China does not have – persistent high inflation that makes easing monetary policy difficult. Europe is already facing a hard landing
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On Tuesday, the Organisation for Economic Cooperation and Development (OECD) published its latest outlook for the global economy. Describing the prospects for growth as “weak”, with risks “tilted to the downside”, the OECD singled out two worrying trends.
The first was the much weaker-than-expected recovery in China. A sharper downturn would have significant spillover effects for the rest of the world, especially if it were accompanied by much tighter financial conditions stemming from an abrupt repricing of risk.
The second major source of concern was increasing evidence that the dramatic increase in interest rates since the middle of last year was taking its toll on global growth and trade.
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Yet, despite these headwinds, the OECD urged leading central banks to keep policy restrictive until there were clear signs that “underlying inflationary pressures were durably lowered”. Tellingly, it warned there was limited scope for rate cuts “until well into 2024 for most advanced economies”.
The fact that the OECD is worried about contagion from China shows the extent to which the distress and loss of confidence in the country’s property sector pose a risk to global growth. However, the title of its report – “Confronting inflation and low growth”– makes it clear that stagflation is the biggest threat.
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China clearly has a growth problem. Survey data showed that the downturn in the country’s manufacturing sector – a key source of weakness due to sluggish domestic consumption and the slump in global demand – eased somewhat last month but was a tad below the 50 mark signifying a contraction in output.
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