The three tenors are out of tune at the same time, and the windows of the farm building shake, although they don’t break. If so, no one expects a deep or prolonged recession in the major powers, labor markets are performing appropriately, and a de-escalation in inflation is taken for granted, but the idea that the United States, Europe, and China could fail together is enough, and accurate The International Monetary Fund (IMF) warns of this scenario: its executive director, Kristalina Georgieva, explained in an interview with the American chain CBS that a “simultaneous slowdown” in growth is taking place in the three blocks and calculates that a third of the planet a year will enter a recession in 2023.
British economist Charles Goodhart, a senior Bank of England official for nearly two decades, is not optimistic about the outcome of a parallel slowdown. “Should that happen, there would be significant spillover effects to the rest of the world, which would also grow more slowly, suffer more unemployment and have lower income and consumption. In short, more misfortune.” The former professor at the London School of Economics finds different causes for the slowdown. “In China, it is the mismanagement of the Covid epidemic; in the US, it was the result of excessive fiscal and monetary expansion; and in the EU it comes from the supply shock caused by the war in Ukraine,” he summarizes.
The starting points are different. The United States suffers the most aggressive Fed rate hikes, but is close to full employment – 3.7% unemployment – benefits from gas and oil exports in an environment of high energy prices and has its inflation rate at 9.1% a year lowered June to 7.1% in December. In Europe, almost everything revolves around the war Putin has unleashed on his doorstep and his energy dependency, while in China the virus and his controversial way of fighting it are on the agenda that could place its growth in 2022 – still known – for the first time in the last 40 years with rates equal to or below the global average.
Roland Gillet, professor of financial economics at the Sorbonne University in Paris and at the Free University of Brussels, sums up the situation of every power in one word. China has been credited with insecurity because it is the collision of two opposing forces: a tsunami of contagion amid an economy finally freed from the straitjacket of automatic lockdowns as Beijing abandons its restrictive zero-Covid policy. In his favor, he believes, the advantageous oil supply contracts – with significant discounts – that he signed with Russia after losing Moscow to its Western customers also played a role. And inflation remained contained at 1.6% in November.
For the other two, the diagnosis is the opposite: Europe is the fragile and the US is the one that resists best. “With every day that goes by, Europe is getting poorer compared to the US because they produce their own energy. Any savings Europeans have pent up during the health crisis that should have been spent in restaurants and shops are being used on heating bills or fuel and that money is going abroad, it’s not for Europe’s growth, something that’s happening in not in the USA, uh,” he complains. A set of data is intended to clarify the cuts made by some US companies: the oil companies Exxon and Chevron alone are likely to make a combined profit of around $100,000 million in 2022.
Lorenzo Codogno, former Italian finance minister, does not rule out an improvement in activity in China as its economy reopens, although the risks of new lockdowns or the emergence of unknown variants remain. But he remains cautiously optimistic about major power developments in 2023. “The good news is that unless a new shock occurs, the recession is unlikely to be very deep and long-lasting in this case. There is a lot of resilience in the system, public and private investment, accumulation of private savings, the untapped recovery of demand for services or the resistance of the labor market,” he lists.
real estate risk
The headline of a simultaneous slowdown hides other nuances. It is true that the explosion of infections in the Asian giant after exiting its zero-Covid policy has the potential to collapse its healthcare system and seize part of the production machinery of the world’s great factory, which has already caused sharp price falls of oil, pricing in lower Chinese demand, but Ignacio de la Torre, chief economist at Arcano Research, reminds that the main forecasts still point to robust growth in its GDP. “Not everything Georgieva says has to be coherent. In fact, the market is betting on greater Chinese growth in 2023, which would jump from 3% to 5%,” he claims. For example, the forecasts of the US banks Morgan Stanley – which have raised their forecast for China in 2023 from 5% to 5.4% – or JP Morgan – from 4% to 4.3% point in this direction.
This is no obstacle for De la Torre to perceive the greatest risks in China. “It brings together the three conditions that can trigger a crisis: too much past optimism – especially in real estate -, excessive debt and illiquidity – too many assets in illiquid real estate -” he warns. The crisis at Chinese real estate giant Evergrande was the most publicized news, but the price correction in the industry is already profound. “The crisis has already exploded. It’s very reminiscent of the situation in Spain in 2008, when people continued to deny the greatest, starting with the vice president for economic affairs,” says De la Torre, who adds to this cocktail a worrying health situation due to the lower effectiveness of Chinese vaccines, the high percentage of elderly people, who have not received a booster dose and the reduced capacity of their hospitals and health centers. His analysis is friendlier to Europe and the US: “In the second half of the year, inflation in the West will grow less rapidly than wages, and consumption will be activated again, and with it growth. The West does not pose systemic risks like those shown in China.”
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