The World Economy Catches Some Lucky Breaks
From China’s pivot to interest rates, things haven’t gone terribly this week. That alone is good news.
(Bloomberg Opinion) -- The world economy’s challenges are formidable enough that even the so-so can be cheered. Developments that not so long ago would be seen as the bare minimum required to put a floor under dwindling growth are now regarded as encouraging. Grasping at straws? Thankfully, there may be more to it.
In recent days, Beijing has recalibrated the Covid-Zero strategy that has been a major brake on commerce, and developed plans to rescue the collapsing property sector. Leaders of the US and China set a more positive tone for relations after meeting in person on Monday. Federal Reserve officials supported expectations that the most powerful central bank will shift to less gargantuan interest-rate hikes, while the dollar has lately retreated from the stratospheric levels that led to strains in global finance.
None of these amounts to a great leap forward for the global economy. They do address — even if temporarily — some of the big negatives. Covid Zero, which has seen large urban areas locked down and onerous curbs on travel, had become a proxy for whether China has the will to lift itself from the doldrums. “Xi’s team is committed to, once again, re-accelerating Chinese economic growth,” Ken Griffin, founder of the Citadel hedge fund, said on the sidelines of the Bloomberg New Economy Forum in Singapore this week. The damage done may last for years, but there is at least a tacit acknowledgement that the prior path was unsustainable.
Still, there are substantial negatives. China's economy, which has been a boon to the world for decades, continues to struggle: data released Tuesday showed retail sales sagged and industrial output slackened. The International Monetary Fund became gloomier about the state of the world, saying difficulties are “immense.” Policymakers are trying to navigate an unhappy combination of high inflation and sluggish growth. Food prices have been a flashpoint this year, with countries enacting a number of protectionist measures to curb shortages. “All it takes is one really bad crop, let’s say in North America or South America, to really send prices higher,” David MacLennan, chief executive officer of Cargill Inc., said at the Bloomberg NEF.
That makes what is going right, or at least not terribly, all the more worthy of attention. For those who spent the past few months sweating the dollar’s rampage and the risk it posed, especially to emerging markets, take note of Lael Brainard’s comments on Monday. The Fed vice chair, someone with an especially keen feel for the global economy, signaled she favors stepping back from 75 basis point hikes as soon as next month. Christopher Waller, one of the most hawkish Fed governors, left the door open Wednesday to backing 50 basis point steps. Mary Daly, president of the San Francisco Fed, told CNBC the same day that “the discussion is, rightly, in slowing the pace.’’ No, the Fed’s work isn’t done — nor is that of most monetary agencies — but the most intense phase of tightening looks more and more like it’s behind us. That’s a message echoed by European Central Bank Governing Council member Francois Villeroy de Galhau. “Jumbo hikes will not become a new habit,” he told a conference in Tokyo on Tuesday. Minutes from the Reserve Bank of Australia’s Nov. 1 board meeting indicated a high bar for returning to large hikes and even held out the prospect of a pause.
It’s becoming increasingly common to hear policymakers speak of lags and emphasize that rates have moved up quickly this year. This is code for seeking an opportunity to dial back the aggression and, next year, pause. Some economists see rate cuts in 2023 in part because faltering growth will damp prices. While this might be seen as good news, it’s important to remember the context. Having been surprised in the prior decade by the relative absence of inflation, policymakers didn’t want to jump too soon. Officials bet “on the wrong side” of inflation last year, Singapore’s Senior Minister Tharman Shanmugaratnam reminded us this week. Recession is the “price we pay,” he said.
Nor will China’s economy suddenly switch to happy days. Its exit from the pandemic could run through the end of next year, with reopening only starting sometime from April and a slow return to normality, according to a recent survey of analysts. Covid Zero hasn’t been banished, but merely reinterpreted. Officials have been urged to be more targeted with their restrictions, not abandon them. Still, the goal is reasonably clear: “Restore the normal order of work and life as soon as possible,” according to a Politburo statement last week.
The world economy isn’t in super shape. Mistakes have been made. But the past week has seen some important developments. Tempting though it may be, don’t look only for the qualifiers. The brittle expansion has caught a few much needed breaks.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
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