China's economic shocks have thrown world off balance

An opinion piece published by Bloomberg asks how much disappointment can the global economy bear considering the plunging trade and sliding prices in China. Caliber.Az reprints the article.

In the later years of the epic US growth stretch that ended with Covid, a phrase began to catch on to describe the buoyant conditions spreading across the globe. The world was said to be on the cusp of an unusually synchronized expansion. Few people still spoke of a jobless recovery in America, and China, after some rare stumbles, appeared to be returning to its old robust self. Inflation was off the floor, seen as a good thing.

Japan and the euro region looked good, the latter having put a crippling debt crisis behind it. The beauty of this surprising togetherness, hailed in early 2017 by articles from Bloomberg News and a story on the cover of The Economist, was that it would lighten the burden carried by the US.

Not even the trade tensions between Washington and Beijing made much of a dent. Happy days beckoned and, for a while, they panned out.

But is the world now beset by a worrying bout of lopsidedness? The picture is discouraging. China, a source of so much commercial vitality the past few decades, just can’t catch a break. Reports this week revealed new blows to a wobbly recovery.

Exports swooned, imports dropped alarmingly and, after months of anemic inflation, consumer prices actually fell in July from a year ago. The deflation is expected to be temporary, given that CPI rose compared with the prior month and that food prices — a big culprit — are projected to pick up. That's little comfort. There's a troubling lack of demand in the second-largest economy.

There's also an abundance of negativity. People are looking for signs of weakness in the Chinese economy, so chastening has been the experience of watching rosy predictions for the reopening fade fast. Another data dump, another dour assessment. The property sector is a source of woe. Country Garden Holdings Co., once the biggest builder by sales, is teetering.

The solutions at hand seem modest and very familiar, such as doing a bit more on the fiscal front and paring interest rates. The central bank is pushing back against bearish bets on the yuan, but not strenuously.

It would be a mistake to be apocalyptic about conditions in China. Major economies go through cycles. We ought to get used to seeing more of them in China. In the meantime, the globe is dependent on the US to keep growth ticking over. If it was a good thing back in the pre-pandemic years for the US to not shoulder the world’s economy alone, must it be bad that divergence now rules?

Recession, or even stagnation, looks like a distant prospect today. Most contemporary analysis celebrates the fading chances of an American downturn soon. JPMorgan Chase & Co. last week joined the ranks of those predicting a slump will be averted. The labour market remains strong, inflation — still exceeding the Federal Reserve’s target — has probably peaked. The debt ceiling impasse was resolved without crisis. Anxiety about the health of regional banks has eased.

JPMorgan is careful not to rule out a recession. The risk of a downturn is “still very elevated,” chief US economist Michael Feroli wrote. Such prudence is wise.

It would be a shame if relief at benign US conditions translated into triumphalism. There was a fair amount around in the late 1990s when the US enjoyed a technology-driven boom, unemployment was low and inflation was behaved. Japan, perceived earlier in the decade as America's main economic rival, appeared to be in decline. Much of East Asia, once dubbed “Tigers” for their rapid transformation, were struggling to shake off a financial bust. People talked of “a new paradigm” and even questioned whether business cycles still existed. China's speedy, but not yet threatening, ascent was a big part of the picture.

But by March 2001, the US was in… recession. Big European powers followed and Japan was in dire straits, serving as a laboratory for so-called unconventional monetary policy that, in time, ultimately came to be practiced in the US and euro zone. The point is that economies aren't static. It's nice that the US has, for now, seen off naysayers.

Yet this American expansion won't last forever. Instead of celebrating, we ought to worry about the rest of the world languishing.

In a recent note, Bank of America Corp. noted the divergence and asked whether the world was less synchronous. The firm recently revised growth forecasts for the US and China — in opposite directions. Noting that soft landings in the US are unusual, the economists said that “a lot still has to go right.” BofA also expressed scepticism about China sinking into a “balance sheet recession” characterized by income being used to pay down debt rather than spend.

Either way, a world economy that's singing out of harmony is one replete with risks. The Fed again finds itself the hinge point. For all the gloom emanating from China, its central bank seems rather passive.

US inflation is still too high for Fed Chair Jerome Powell to start sending out gentle flares about the global economy as he did in late 2018 or as Janet Yellen before him did in 2015, after the People's Bank of China botched a currency devaluation.

Keep an eye on it, though. China's troubles have a way of washing up on everyone's shores.