As policymakers vie to claim the role of chief hawk, spare a thought for what we like to think of as recovery. It’s hard to think of an economy that is traveling comfortably, let alone doing well. All the attention devoted to fighting inflation is drowning out some worrying signs on the growth side of the equation.
Many central bankers argue that the best way to protect the economy is to contain rising prices. They really refer to medium and long term perspectives. Their insistence on raising interest rates in strides and lecturing on the bad old days of the 1970s – when borrowing costs were eased too soon and high inflation took root – means that staggering growth is now a secondary concern, at best.
The authorities aren’t quite saying that an impending downdraft is a fair price to pay. Maybe they don’t have to. Some important ingredients are nevertheless present. The past week has been tough for optimists: China’s export growth slowed dramatically in August and imports barely stayed on the bright side of zero. While Beijing’s strict Covid strategy was partly to blame for the poor outcome, it’s worth remembering that the trade had been a bright spot for China’s otherwise struggling economy, even as some major urban centers were locked down. All that monetary tightening outside of China – Beijing is trying to put a floor to growth – could start to bite. That’s the point.
The weakening global picture is hurting the place that has so often given a good picture of global growth. Beyond China, the Asian powers are suffering. Surveys of purchasing managers in Taiwan and South Korea showed a contraction in manufacturing. Factories also held back in Japan, but remained in expansion mode.
The shift to fighting inflation in the euro zone has been so profound that it was easy to miss the deep cuts in growth forecasts unveiled by the European Central Bank on Thursday. Gross domestic product is likely to grow by 0.9% in 2023, the ECB said, a projection even more optimistic than most forecasts. Bloomberg Economics sees a lead of just 0.4%. The region’s energy crisis makes a contraction before the end of next year a fair bet. None of this is stopping the ECB from considering another giant rate hike to follow Thursday’s 75 basis point move. “Inflation remains far too high,” said ECB President Christine Lagarde.
Federal Reserve Chairman Jerome Powell stuck to his hawkish line on the same day, speaking of the need to act “frankly, strongly.” It was little innovative, but bolstered expectations of a third consecutive 75 basis point hike next week. Will anyone champion growth or accept the prospect of overkill? That’s what makes Lael Brainard’s speech the day before so interesting. The Fed Vice Chair didn’t break the party line, nor could she be expected to, but she shaded the bank’s ultra-hawkish stance.
Brainard said borrowing costs needed to become restrictive, while granting risk would become more two-sided in the future. “The speed of the tightening cycle and its global nature, as well as the uncertainty about the pace at which the effects of tighter financial conditions feed through to aggregate demand, create risks associated with excessive tightening,” she said. said at a conference in New York. Brainard is probably the most international member of the Fed leadership team. She was the Treasury’s top financial diplomat and tried to get the central bank to better understand that what happens beyond US shores matters.
When she was president, Janet Yellen took umbrage at the idea that economic expansions die of old age. It’s a myth, she said in 2015 after the Fed raised rates for the first time in nearly a decade. His predecessor, Ben Bernanke, joked that central banks tended to murder them. Will the current global version survive infancy, let alone adolescence? Otherwise, post-Covid supply chain difficulties and inflation should be added to the roadmap.
China’s economy emerged from the 2020 free fall earlier than its peers and had a robust year to follow. This stimulus has run its course and policymakers around the world should be more worried. The almost uniform desire to tighten “forward” is likely accelerating a downturn that just seems to be ignored as the price of doing business. The workshop of the world launches an SOS
If you want to cheer yourself up, read Brainard’s speech. At least someone is paying attention.