The low-hanging fruit of the pandemic economic recovery has been eaten. As a result, the expansion is entering a new phase – with new risks.
For months, the global economy has grown at a breakneck pace as industries shut down during the pandemic reopened. While that process is barely complete – many industries are still functioning below their prepandemic levels – further healing probably seems more gradual and in some ways more difficult.
Reopening restaurants and gaming arenas is one thing. It’s harder to restore extraordinary backups in shipping networks and semiconductor shortages, one of the most vivid examples of supply shortages holding back many parts of the economy.
And a range of risks, including the hard-to-predict dynamics of Covid variants, could naturally disrupt this transition to a healthy post-pandemic economy.
An imminent risk is that political leaders mismanage things in the world’s largest and second-largest economies. In the United States, a deadlock over raising the federal debt ceiling could push the nation to the brink of bankruptcy. And in China, the fallout from real estate developer Evergrande’s financial troubles is raising questions about the country’s debt and real estate-driven growth.
The Organization for Economic Co-operation and Development last week forecast that the global economy would grow 4.5 percent in 2022, downshifting from a projected growth of 5.7 percent in 2021. The forecast for the United States shows an even stronger slowdown, from 6 percent growth this year to 3.9 percent next.
Of course, a year of 3.9 percent GDP growth would be nothing to scoff at — that would be much faster growth than the United States has experienced for most of the 21st century. But it would mean a reset of the economy.
“We’ve launched and now we’re at crossroads,” said Beth Ann Bovino, chief US economist at S&P Global.
After the global financial crisis of 2008-2009, the major challenge for the recovery was a slump in demand. Workers and production capacity were plentiful, but there was insufficient expenditure in the economy to put that capacity to work. The phase after the reopening of this recovery is the opposite.
Demand is high today — thanks to pent-up savings, trillions of dollars in federal stimulus dollars and rapidly rising wages — but companies report struggling to find enough workers and raw materials to meet that demand.
Dozens of container ships are supported in Southern California ports, waiting their turn to unload products intended to fill U.S. store shelves during the holiday season. Car manufacturers had to shut down factories for lack of semiconductors. Builders have had a hard time getting windows, appliances, and other key products needed to complete new homes. And restaurants have cut hours due to lack of kitchen help.
These tensions actually act as a brake that slows down the expansion. The question is how much, and for how long, that brake will be pressed.
“The kind of growth rates we’re seeing was a recovery from a really severe recession, so it’s no surprise that this isn’t going to last,” said Jennifer McKeown, head of the Global Economics Service at Capital Economics. “The risk is that it’s less about natural cooling and more about supply shortages that we’re really starting to bite. That may mean that economic activity will not continue to grow as we expect, as activity has instead stagnated and price pressures have begun to mount.”
The problem is that the supply shortages have many causes, and it is not clear when all of them will decrease. Spending worldwide, and especially in the United States, shifted more rapidly to physical goods than to services during the pandemic, faster than production capacity could adjust. The Delta variant and the continued spread of Covid have led to production restrictions in some countries. And the delayed effects of production shutdowns in 2020 are still being felt.
Then there are the risks lurking in the background — the kinds of things that aren’t widely predicted to be a source of economic distress, but could unravel in unpredictable ways.
Debt ceiling brinkmanship in Washington is a good example. Republicans in the Senate are insisting that they will not vote to raise the federal debt limit, and that Democrats will have to do it themselves — while also planning to filibuster Democratic efforts to do so.
If no agreement is reached, there is a risk that federal obligations will not be met and a financial crisis may arise. For that reason, a deal has always been struck in these cases, even if, as in 2011, this caused a great deal of uncertainty.
The risk here is that both sides may be so determined to stick to their positions that there is a miscalculation, like two drivers in a hen who both refuse to swerve. And for those closest to US fiscal policy making, that seems like a meaningful risk.
“The probability of default is still slim and Congress is likely to raise the debt ceiling. but the road to a deal is darker than usual,” Brian Gardner, chief policy strategist in Washington at Stifel, said in a research note. He added that the political game of chicken could shock markets in the coming weeks.
And on the other side of the Pacific, the Chinese government has its own challenge as Evergrande struggles to make payments on $300 billion in debt.
Real estate has played an outrageous role in the Chinese economy for years. But few analysts expect the problems to spread far beyond China’s borders. China’s banking and financial system is largely self-contained, unlike the deep global ties that enabled the failure of Lehman Brothers in 2008 to trigger a global financial crisis.
“Everyone has learned a few tricks since 2008,” said Alan Ruskin, a macro strategist at Deutsche Bank Securities. “What you have here is the second largest economy in the world, and an economy that lifted all boats could slow down more equipment than people expected. I think that’s the primary risk, rather than the financial interlinkages shifting globally.”
All of this could make for a bumpy fall for the global economy, but which in the most likely scenarios would lead to a solid 2022. If all goes as forecasters expect.