It's not just the US. The world economy is slowing down.
Inflation is soaring in European countries as the war in Ukraine sends prices for heating, gas, food and other necessities soaring. China's “zero coronavirus” policy of strict lockdowns and mass testing continues to disrupt the production of goods. And central banks around the world are raising interest rates in an attempt to curb price increases by dampening consumer demand.
The International Monetary Fund has revised down its growth forecast for 2023, predicting that the global economy will grow by 2.7% in 2023, up from 3.2% this year. The IMF said in a report last month that the global economy faces “tough challenges” as pandemic-related supply chain disruptions, the war in Ukraine, a slowing Chinese economy and rising interest rates weigh on growth.
“In short, the worst is yet to come and 2023 will feel like a recession for many,” the group said in its report.
In the United States, fears of a recession are growing and inflation remains high. Some economists and investors have expressed concern about the Federal Reserve's aggressive interest rate hikes and how much it could weaken the world's largest economy. Central banks are trying to slow consumer demand by making borrowing more expensive, which should lead to slower price increases. But if companies significantly slow hiring or lay off employees in response, it could also trigger an economic downturn.
Still, some economists argue that the United States is actually in a better position than many other countries. European countries, for example, are experiencing dramatic recessions as energy supplies are further hit by the Ukraine war. Many U.S. households still have surplus savings from the pandemic, and the U.S. unemployment rate remains low.
“We've been raising interest rates quite aggressively, and financial market conditions in the U.S. have tightened,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “But so far, the economy has weathered it reasonably well. Inflation is high in the United States, but inflation is high almost everywhere.”
Central banks around the world are raising interest rates to counter soaring prices. The European Central Bank started raising interest rates earlier this year, but officials recently suggested they are not done yet. The Bank of England has also raised interest rates multiple times this year.
There are several factors contributing to global economic instability, from the war in Ukraine to China's strict coronavirus measures and a weakened real estate industry.
ukrainian war
The war in Ukraine has caused an energy crisis in Europe, leading to soaring prices. Countries that relied on energy imports from Russia, such as Germany and Italy, have been particularly hard hit by natural gas supply constraints.
Eurozone inflation rose to 10.6% year-on-year in October from 9.9% the previous month. In the UK, inflation has also skyrocketed due to soaring energy bills. UK consumer prices rose 11.1% in October compared to the previous year.
The war also disrupted exports of food such as wheat, sunflower oil, and other agricultural products, straining the world's food supply and further pushing up inflation.
These price increases could lead to a painful economic slowdown, as items like food and gas tend to be household necessities. Raghuram Rajan, a professor at the University of Chicago Booth School and former chief economist at the IMF, says that when European consumers spend more on these products, they have less money available for other goods and services. said.
“Energy and food are important parts of household finances,” Rajan says. “The more you spend on necessities, the less money you have for discretionary items, so you need to cut back on that spending.”
Pierre Lafourcade, global economist at UBS, said European households have also not accumulated as much excess savings as Americans. Early in the pandemic, U.S. lawmakers passed further stimulus checks, sending checks directly to consumers, leading to more robust savings and easing the burden on household budgets.
“There was no equivalent in the eurozone,” Laforcado said. “In both the euro area and the UK, there was no such thing as excess savings.”
Economists at UBS expect global economic growth next year to be 2.1%, the slowest growth rate since 1993. UBS expects 13 of the 32 countries to contract for at least two quarters, which its economists say is akin to a global recession.
The Ukraine war worsened global inflation, but consumer prices were already rising around the world before the Russian invasion. Factory closures after workers tested positive for the coronavirus increased demand for goods among U.S. consumers, driving up prices for many goods. The IMF expects global inflation to rise from 4.7% in 2021 to 8.8% in 2022, but the IMF expects overall price growth to fall to 6.5% in 2023.
However, the main factors driving inflation in the United States are different from those in European countries.
Karen Dynan, professor of economics at Harvard University and nonresident senior fellow at the Peterson Institute for International Economics, said inflation in the U.S. affects a broader range of goods and services than in other countries; said it was due to strong consumer demand. Early in the pandemic, people stuck at home ramped up spending on things like stationary bikes and work-from-home equipment. Supply chain disruptions have made it difficult to produce and transport goods around the world, leading to soaring prices.
Dinant said inflation in Europe was mainly caused by rising energy and food prices due to the war in Ukraine. He said lower energy and food prices would significantly ease price increases in European countries, but would have little effect on lowering overall U.S. inflation.
“In the United States, that alone is not enough to address the inflation problem because the scope of inflation is broader,” Dynan said.
China's economic slowdown
Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the IMF, said China is under “extreme duress” due to strict coronavirus measures and a weakened real estate industry.
China's economy, the world's second-largest, was hit hard as it tried to stamp out the coronavirus outbreak through massive lockdowns and mass testing efforts. Economists expect China's economy to return to growth next year as restrictions could be eased, but the “zero-corona” approach has already disrupted the production of goods, depressed consumer spending and sparked protests over the policy. This has led to the expansion of activities.
The real estate sector, which accounts for about one-fifth of China's economic activity, has also fallen sharply. Sales and real estate prices have been rising in China's housing industry for many years. But excessive borrowing from developers has led to construction delays and falling home prices over the past year, sparking anger among Chinese homeowners. Earlier this month, the Chinese government issued several directives to boost the real estate industry, but economists say the sector is unlikely to recover quickly.
Rogoff said that while the U.S. economy is “clearly in better shape right now” compared to European countries and China, the global economic downturn has many negative implications for U.S. consumers. If consumers in other countries cannot afford to buy more American products, it could have a negative impact on American businesses and their exports. If companies with large overseas operations earn less money in those countries, that could lead to lower pay for U.S. employees, Rogoff said.
And while the U.S. economy is holding up now, the country could still experience a painful recession in the coming months as the Fed continues to raise interest rates.
“If we tighten too much, we'll probably end up in a worse situation than in Asia,” Rogoff said. “The bar is low as to whether we will do worse than in Europe.”
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