March 10, 2023
BEIJING – When Chinese policymakers began preparing for the re-opening, many international observers warned it would unleash inflationary headwinds. This was their assumption: As the world’s biggest factory and the second-largest economy re-opens for business after three years of COVID-19 pandemic restrictions, it will have to cope with a surge in demand. That, in turn, would trigger global inflationary pressures as in the United States and the European Union, which have been struggling with elevated inflation since their re-opening.
There’s only one problem with the story. Numbers do not back it up.
The US’ annual inflation rate, which had soared close to 10 percent in summer last year, slowed, but slightly, to 6.4 percent in January, although the interest rate has been hiked to almost 5 percent.
In the eurozone, the situation was worse as inflation remained 8.5 percent in February 2023 after peaking at 11.1 percent in November. Meanwhile, policymakers have raised interest rates to 15-year highs to bring euro area inflation under control. Markets expect a 0.5 percentage point increase this month up to 3.5 percent, with a chance of a similar hike to be delivered in May.
Even in Japan, where inflation was actually negative until the fall of 2021, it rapidly soared to 4.3 percent in January 2023, and continues to rise. As a result, Japanese central bank’s new chief Kazuo Ueda is likely to raise the interest rate over time.
Despite the media hysteria in the West, China’s annual inflation rate rose to only 2.1 percent in January. And as expected, prices of food jumped and those of non-food gained further on the back of the Lunar New Year and the lifting of the strict pandemic prevention and control measures.
But the inflation rate was only half relative to Japan, a third compared with the US and a fourth compared with the eurozone.
After US’ self-defeating trade wars, a pandemic-induced economic slowdown, an unwarranted proxy war, US efforts at another Cold War, and a series of energy and food crises, the global economy has been further penalized by the US Federal Reserve’s ill-advised monetary policies, particularly since the fall of 2021.
After years of easy money and rounds of quantitative easing, the Fed misread the market signals after mid-2021, when inflation started to rapidly climb up and Fed chairman Jerome Powell downplayed the threat of soaring prices by calling them “transitionary”.
Over a year ago, I had warned that inflation in the US could pose a risk to the global economy in 2022. Indeed, due to the belated monetary response, the ensuing risks penalized the ailing global recovery. In February 2022, after the disastrous failure of international diplomacy to end the Russia-Ukraine conflict and the onset of the US-NATO-led proxy war against Russia in Ukraine, I predicted the world economy would have to cope with the risk of stagflationary recession, compounded by energy and food inflation and the consequent cost-of-living crises.
The Fed raised the interest rate to 4.5-4.75 percent in its February 2023 meeting, still pushing borrowing costs to the highest since 2007. Recently, Fed Chairman Jerome Powell warned of more rate hikes and seems to be aiming at 5.25 to 5.5 percent, thus flirting with a recession.
Since the Central Economic Work Conference in December, Chinese policymakers have been stimulating private sector growth by taking measures to accelerate domestic demand and deepen regional and international trade and investment. They have also implemented a variety of measures to expand consumption, though the momentum is on the supply side, particularly infrastructure.
Already on the eve of the Two Sessions, Chinese leaders pledged stronger growth, and recovery is taking hold as economic activity picks up pace due to China’s re-opening. Thanks to the recovery potential and despite the dismal first quarter, China’s GDP growth could soar to 5.5-6 percent in 2023, or more than 6 percent on a quarter-to-quarter basis.
Ironically, external risks have been in part reduced by the misguided US trade wars and protectionism, which have compelled Chinese policymakers to stress the importance of self-sufficiency. Internally, the emphasis on social policies is meant to help increase the purchasing power of the new middle-income groups, without the kind of economic polarization that four decades of neoliberal policies have caused in the West.
Since the recovery will be demand-led, the spillovers will center on consumption and services in China. In addition to domestic demand, the recovery will also have an impact on global growth through commodity demand and travel, while the recovery in outbound tourism will be key to regional, and neighboring, economies’ recovery. The global effect is already discernible in commodity prices. As the recovery broadens, oil and metals will follow.
However, spillovers will be significant in those economies that are part of the Regional Comprehensive Economic Partnership, the vast new trade bloc, and those participating in the huge Belt and Road Initiative.
Unlike the US, the eurozone and Japan, which are struggling with secular stagnation and exporting runaway inflation, China’s growth is accelerating while inflation remains in check. The reopening could lift global GDP by an impressive 1 percent in 2023. In brief, China’s rebound will be positive for the world and offset the Fed risks.