[Turning Point Approaches] The Card That Will Lead the Global Economy's 'Rebound' This Year

Disinflation and China Reopening Variables
Ukraine War De-escalation Also a Key Watchpoint

[Asia Economy Reporter Haeyoung Kwon] This year, dark clouds of recession are looming over the global economy. The full impact of last year’s interest rate hikes by inflation firefighters (central banks of various countries) to curb soaring prices is expected to arrive, raising concerns that the wheels of economic growth could get stuck in the swamp of recession. However, despite last year’s high-intensity tightening and continuous distress in capital markets including the stock market, the global economic scale (GDP) is expected to exceed $100 trillion for the first time in history. Factors such as slowing inflation growth this year, the pace adjustment of tightening by various countries, economic recovery following the easing of China’s COVID-19 lockdown policies, the prolonged Ukraine war shaking the European economy, and the dilemmas faced by countries are considered elements that could create a turning point to pull the global economy out of recession.

Disinflation (the phenomenon of declining inflation rate)

The key indicator that will determine the direction of the global economy this year is inflation. The stabilization of energy and food prices, which surged due to the trigger of the Ukraine war, and the pace adjustment of monetary tightening policies by central banks worldwide are crucial. In particular, the fact that inflation in the United States, which dominates the global economy, appears to be calming down is a sign that increases the possibility of a turning point forming in the global economy this year. The U.S. consumer price inflation rate slowed from 9.1% in June last year to 7.1% in November, peaking and then declining. The Organization for Economic Cooperation and Development (OECD) forecasts that the U.S. annual inflation rate will be 3.5% this year. Although this is higher than the central bank’s target (2%), it is significantly lower compared to last year’s forecast of 6.2%.

Jerome Powell, Chair of the Federal Reserve, at last month’s Federal Open Market Committee (FOMC) meeting, ended the streak of four consecutive giant steps (0.75 percentage point rate hikes) and implemented a big step (0.5 percentage point hike). However, he warned against the market becoming complacent about inflation, stating, “There is a forecast that service inflation will not come down quickly. We will have no choice but to raise rates to the level we want.”

Karen Dynan, a professor at Harvard University and senior fellow at the Peterson Institute for International Economics, predicted, “The positive aspect for global economic growth is that inflation is beginning to subside on its own and policymakers are agile enough to recognize and adapt accordingly.” She added, “Generally, if we remember that the goal of economic policymakers is not to have people consume less but to find ways to produce more, the situation will improve.”

[Image source=Yonhap News]

If U.S. inflation stabilizes within the year, there is a possibility of a turning point leading to interest rate cuts. Ed Yardeni, founder of Yardeni Research, said, “The key is whether inflation falls significantly more than expected. There is a narrow path toward a soft landing,” adding, “Conversely, if the economy is too strong and a recession is avoided, the Fed will have to raise rates much more.” The fact that the labor market is gradually slowing is a positive sign. Last week, initial jobless claims in the U.S. increased by 9,000 from the previous week to 225,000, the highest since February last year. This is similar to the nearly full employment level before COVID-19 in 2019 (218,000) but indicates that the U.S. labor market is beginning to slow down.

After the Spread of COVID-19 in China

China’s lifting of COVID-19 restrictions is expected to cause relatively difficult short-term challenges such as a resurgence of COVID-19 and the spread of new variants, but the dominant view is that herd immunity and economic normalization will be achieved in the long term. The possibility of an economic turning point due to changes in China’s pandemic policies has increased this year.

Bloomberg Intelligence (BI) forecasts that if China completes its transition to a “with COVID” approach by mid-year, it could achieve an economic growth rate exceeding 5%. Morgan Stanley in the U.S. also raised its growth forecast for China next year from 5% to 5.4%. Daniel Lacalle, chief economist at global asset management firm Tressis Gestion, said, “The most positive event the market can expect next year is the full reopening of China’s economy,” adding, “China’s economic reopening will act as a major driver for the global economy.”

Some argue that China’s economic rebound could fuel U.S. inflation through increased demand, but others observe that it could benefit the global economy excluding the U.S. Steven Englander, head of foreign exchange research at Standard Chartered, said, “Concerns about Europe’s energy security will weaken this year,” and “China’s resumption of economic activity could help the economies of major countries.” Lacalle added, “Europe’s economy suffered greatly from China’s lockdowns,” and “China’s economic reopening will provide strong support for global growth.”

[Image source=AP Yonhap News]

Will the Ukraine War Continue?

The growing fatigue of the international community regarding the Ukraine war is also expected to act as a turning point for the global economy. Ukraine is receiving additional military support such as the U.S. Patriot missile system, Europe is pressuring Russia through a price cap on oil, and Russia may take strong measures such as strengthening relations with allies like China and reducing natural gas sales. However, the fact that economic forecasts of countries viewing the Ukraine war, which triggered last year’s inflation surge, are not smooth adds weight to the expectation that the war could come to an end within the year. Charles Grant, director of the European Reform Center, said, “Despite tens of thousands of Ukrainians killed by Russia in the war, France, Italy, and Germany, alongside the U.S., will eventually urge Ukraine to concede territory and reach a peace agreement,” adding, “Biden and his allies are expected to cooperate with the Kremlin in the long term and may take a more diplomatic approach.”