The new fault lines on which the world economy depends
THE IS PANDEMIC caused a frightening economic collapse, but now a strange, exciting boom is in full swing. The price of oil has risen, as restaurants and haulage companies have had to fight back and be more tender to recruit staff. As listed company firms whose earnings will hit an all -time high this year, stockmarkets have been in tears. An index produced by JPMorgan Chase and IHS Markit suggested that global growth is at its highest since the buoyant days of 2006.
Any escape from covid-19 is a cause for celebration. But today’s emerging economy is also a source of anxiety, as the three fault lines lie underground. Together, they will determine who to obey, and whether the unusual recovery in living memory can be maintained.
The first line of fault separates the jabs from the jab-nots. Only countries that get arm vaccinations can tame covid-19. That is the condition for shops, bars and offices to open permanently, and for customers and workers to have the confidence to leave their homes. But only one in four people worldwide has had the first dose of the vaccine and only one in eight is fully protected. Even in America some unvaccinated states are vulnerable to the infectious variety of the Delta virus.
The second fault line runs between supply and demand. The lack of microchips has disrupted the manufacture of electronics and cars when consumers want to binge on them. The cost of shipping goods from China to ports on America’s west coast has doubled from its pre-pandemic level. Even if these bottlenecks are blocked, newly open economies will create fresh imbalances. In some countries people seem to be more keen to drink than they are to work behind bars, caused by the lack of labor structure in the service sector. House prices have risen, indicating that rents will soon start to rise as well. It can keep inflation down and deepen the feeling that the house can’t afford it.
The final fault line is in the release of the stimulus. At some point, state interventions that began last year should be reversed. Rich-world central banks have bought assets worth more than $ 10trn since the pandemic began and are nervous about considering how to release themselves without causing a flap in the capital markets by Too fast. China, whose economy will not shrink in 2020, offers a sign of the future: it has tightened credit policy this year, slowing its growth.
Meanwhile, government emergency assistance schemes are starting to expire, such as top-up unemployment insurance losses and dismissals. Households are unlikely to get a fresh infusion of “stimmies” in 2022. Deficits will contract rather than expand, dragging down growth. So far, economies have largely avoided a wave of devastating losses but no one knows how well companies will cope once emergency loans arrive and workers will no longer be thinned at the expense of taxpayers. .
You might think that an event as severe as a pandemic, combined with an unprecedented response to it, would provoke an equally intense economic reaction. Pessimists are worried about a return to the 1970s style, or a financial crash, or that the underlying energy of capitalism will be depleted by state handouts. Such apocalyptic outcomes are possible, but they are unlikely. Rather a better way to think about the unusual perspective is to examine how the three fault lines interact differently in different economies.
Start in America. Of the many vaccines and massive stimulants, this is the one at the greatest risk of overheating. In recent months inflation has reached levels not seen since the early 1980s. The labor market is subject to strain as economic activity changes. Even after an 850,000 increase in the number of jobs in June and considering abundant vacancies, the number of people working in leisure and hospitality was 12% lower than before the pandemic. Workers are reluctant to return to the industry, which has pushed up wages. The hourly pay is nearly 8% higher than in February 2020. They will probably return when emergency unemployment benefits expire in September. But countries without such a scheme, such as Australia, are also seeing labor shortages. Attitudes to work can change under the income spectrum, among waiters and cleaners, not just among professionals with heels who dream of yachts and sabbatical. All of this indicates that the American economy will run hot, with continued pressure on the Federal Reserve to tighten policy.
Elsewhere in the rich world the picture is less fun. This includes some jab-nots, such as Japan, which have completely vaccinated less than 15% of its population. Europe is lagging behind vaccines, but its smaller stimulus means inflation has not reached American levels. In Britain, France and Switzerland 8-13% of employees remained on furlough schemes at the end of May. In all of these economies the risk is that policymakers will overreact to temporary, imported inflation, withdrawing support too quickly. If so, their economies will suffer, as the euro area suffered after the 2007-09 financial crisis.
Low and middle income countries are in a bond. They should benefit from increasing global demand for factory goods and factories, but they are struggling. Indonesia, battling another wave of covid-19, is replenishing oxygen from industry to hospitals. By 2021 the poorest countries, which are desperately short of vaccines, are projected to grow more slowly than the richest countries for only the third time in 25 years.
Although covid-19 weakened their recoveries, emerging markets faced the prospect of higher interest rates with the Fed. That tends to reduce the pressure of their currencies as investors buy dollars, which increases the risk of financial instability. Their central banks have no luxury of ignoring temporary or imported inflation. Brazil, Mexico and Russia have been raising interest rates recently, and more places could follow. The combination of jabbing late and tight tightening is very painful.
Get ready for shelter
The economic cycle has become furious, remaining the fall in just one year. Perhaps by the summer of 2022 most people will be vaccinated, business will adapt to new demand patterns and stimulus will be comforting in a harmonious way. However, in this strange boom, beware of fault lines. ■
Central banks face a daunting task: taping without revolt (July 2021)
Surprising inflation rate is increasingly driven by wages, not commodities (July 2021)
This article appeared in the Leaders section of the print edition under the headline “Lines of error in the world economy”