Downside risks to the global economy
Affected by the epidemic and regional wars, the world economic situation in the first half of this year is not optimistic. The China Federation of Logistics and Purchasing (CFLP) announced on July 6 that the global manufacturing purchasing managers’ index was 51.2% in July, down 1.1 percentage points from the previous month and down for the second consecutive month-on-month, which is a new low since July 2020. Meanwhile, by region, the manufacturing PMI for Asia, Europe, the Americas and Africa all fell to varying degrees in July from the previous month, and all hit phase lows. In addition, the U.S. inflation index has been soaring since the first half of last year. Since this year, U.S. inflation has further deteriorated; the U.S. Consumer Price Index (CPI) remains high, with year-over-year increases at record highs. The global manufacturing purchasing managers’ index fell for 2 consecutive months, showing the trend of continued slowdown of global manufacturing growth, further weakening of global economic recovery momentum and increasing downward pressure. Expert analysis believes that the impact of the epidemic, inflationary pressures, geopolitical conflicts, tightening monetary policy and many other factors have led to a weakening of global economic recovery momentum. The combination of these factors makes the global economic demand contraction pressure further increase. The global new orders index for major countries generally declined in July from the previous month. In its July World Economic Outlook report, the International Monetary Fund lowered its forecast for global economic growth in 2022 from 3.6% to 3.2%.
Experts say that striking a balance between preserving economic recovery and fighting inflation is still a problem facing the world’s major economies. From the changes in the price indices of major countries, the relevant policies to combat inflation have to some extent curbed the momentum of the excessive rise in raw material prices. However, inflationary pressures are still the main problem plaguing the global economic recovery, and the pressure of slowing economic recovery caused by fighting inflation remains high.
In addition, a recent research report released by the China Insurance Asset Management Association also shows that the 107 respondents, mainly investment executives and macro research experts, chose global inflation upside risk as the most important factor in judging the uncertainty of the global macro situation in the second half of the year that has the greatest impact on the allocation of major asset classes.
U.S. CPI index shows significant increase
In fact, before the release of the U.S. CPI data of June, the International Monetary Fund has lowered the U.S. economic growth expectations twice in a row, and polls show that the U.S. public is increasingly pessimistic about U.S. economic growth expectations.
On July 12, the International Monetary Fund lowered its 2022 and 2023 U.S. economic growth expectations to 2.3% and 1%, respectively, the second time since June this year that the IMF has lowered its U.S. economic growth expectations. In late June, the IMF lowered U.S. economic growth expectations for 2022 to 2.9% from the April estimate of 3.7%, and for 2023 growth forecast to 1.7% from the April estimate of 2.3%.
These highlight the deteriorating prospects for U.S. economic growth in the context of the Fed’s interest rate hikes in response to high inflation. The International Monetary Fund said the United States will be difficult to avoid recession. According to a poll released on the 11th, 70% of Americans believe a recession is imminent and 59% believe it will happen in the next six months. Another U.S. media reports, through a well-known economic model shows that the U.S. recession may have already begun, the U.S. economic performance in the first two quarters of this year has met the definition of recession in the general sense. According to the U.S. Department of Labor, the U.S. Consumer Price Index (CPI) has remained high so far this year, with year-over-year growth of more than 7% for six consecutive months.
Meanwhile, the data show that in January this year, the U.S. CPI was up by 7.5% year-on-year, a record high in 40 years; in February, the U.S. CPI rose by 7.9% year-on-year, again setting a new record; in March, the U.S. CPI continued to move higher, up by 8.5% year-on-year, the first time in decades more than 8%; in April and May, the U.S. CPI rose by more than 8% year-on-year, of which the CPI rose again in May A record, rising to 8.6%; in June, the U.S. CPI rose 9.1% year-on-year, up more than 9% for the first time.
Why is U.S. inflation struggling to ease?
The protectionist policies adopted by the U.S. government have long exposed U.S. businesses and consumers to higher costs of imported goods, while in response to the impact of the Newcastle pneumonia epidemic, the U.S. government simultaneously launched a large-scale fiscal policy and ultra-loose monetary policy, resulting in an overheated economy and imbalance between supply and demand after the epidemic has subsided, with corporate production recovery failing to keep pace with consumer rebound. At the same time, the U.S. labor market is undersupplied, and there is a huge difference between vacant jobs and available labor. While companies are raising employee salaries, housing costs, which are highly weighted in overall inflation, are increasing. These factors have contributed to the high level of inflation in the United States.
Former U.S. Treasury Secretary Larry Summers said: Previously, in response to the impact of the epidemic, the Federal Reserve lowered interest rates to near zero, and a “demand wave” hit U.S. society, with people’s suppressed demand being released during the epidemic, and a large outflow of deposits in banks, as well as large-scale fiscal policy and economic stimulus packages were adopted. I think these policies led to excessive demand on the one hand, but on the other hand, the labor market was undersupplied and the economy was overheated, so the inflation rate continued to rise and remained high.
In addition, the U.S. government instigated the Russia-Ukraine conflict and the indiscriminate application of sanctions, leading to a surge in global crude oil and other commodity prices, fueling domestic inflation in the United States. U.S. Treasury Secretary Yellen has said frankly that the increased sanctions against Russia have produced side effects, sanctions on rising food and energy prices in the United States “huge impact”.
In response to high inflation, the Federal Reserve announced a 75 basis point interest rate hike in June, the largest since 1994. However, many experts doubt whether the rate hike can fundamentally solve the inflation problem in the US. Because the reasons behind the current U.S. inflation include not only the U.S. monetary increase, but also involve the global supply chain problems, global commodity supply disruption problems, etc. If the U.S. monetary policy does not operate properly, it is likely that the U.S. economy will fall into recession.
By Shiyue Luo
