The global economy braces for a difficult year
Politicians, policymakers and the public need to prepare for anticipated contingencies and the ‘unknown unknowns’ that are sure to occur
The coming year promises to be a bruising one for the global economy.
A slowdown is certain and the only question is how deep and widespread the slump will be. Downward pressures are severe: the ongoing war in Ukraine, the impact of the COVID-19 pandemic on China — as well as the possibility of another global wave of infections — and continuing efforts by central banks to squeeze inflation out of their economies. Japanese policymakers must prepare for these diverse challenges, ones that will be compounded by a change of leadership at the Bank of Japan and the prospect of instability in the Cabinet.
Kristalina Georgieva, managing director of the International Monetary Fund, has warned that 2023 will be a “tougher” year than 2022, with “one-third of the world economy to be in recession” as the United States, China and the European Union all slow simultaneously. Last October, the IMF projected global growth of 3.2% in 2022 and 2.7% in 2023; in April, the estimate was 3.6% for both years.
Those are the worst numbers for the global economy in this century, with the exceptions of the 2007-2009 Global Financial Crisis and the depths of the COVID-19 pandemic. Expect a further downgrading from the IMF when it publishes its next update, which usually occurs later this month at the World Economic Forum’s Davos meeting.
The sources of these downward pressures are obvious. First, there is the war in Ukraine, which has created uncertainty throughout global markets and hammered European trade. The IMF explained, “the war is having severe economic repercussions in Europe, with higher energy prices, weaker consumer confidence and slower momentum in manufacturing resulting from persistent supply chain disruptions and rising input costs.” The IMF anticipates that as much as half of the EU will be in recession this year.
Rising energy prices are exacerbating inflationary pressures around the world, as are the food and fertilizer shortages triggered by the conflict in Ukraine, which drastically reduced its trade in these products.
That inflation is, warned the IMF, “the most immediate threat to current and future prosperity.” Determined to restore price stability and the erosion of purchasing power, central bankers worldwide — by one count, more than 75 — ratcheted up interest rates. The result, said that IMF, is that “It is likely that the world economy will face recession next year as a result of the rises in interest rates in response to higher inflation.”
The irony of course is that those efforts are working. Inflation is receding in most developed economies. But central bankers insist that it is too early to reverse course. U.S. Federal Reserve Chairman Jerome Powell said after a meeting last month that “we’ll have to maintain a restrictive stance of policy for some time,” a position echoed by European Central Bank President Christine Lagarde. “We’re not pivoting,” she said. “We’re not wavering.”
The final cloud on the economic horizon is the end of China’s “zero-COVID” policy and the resulting rapid spread of the virus throughout the country. The tidal wave of infections has shut down parts of the economy, creating another bottleneck in supply chains and suppressing what has been an engine of global growth.
The IMF is projecting that China’s annual growth will be 3.2% in 2022 and then rise to 4.4% this year. Both are either at or below global levels, making it, for the first time in 40 years, a drag on economic activity rather than a prod. As a result, said the IMF’s Georgieva, “The impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative.” And when China gets past this downturn, the return to growth will again create inflationary pressures because of its renewed demand.
China’s sluggishness will slow all of Asia. The IMF projects growth in emerging Asia to drop from 7.2% in 2021 to 4.4% in 2022 and then chart a slight recovery to 4.9% this year. India will remain something of a bright spot, with 6.8% growth in 2022 and 6.1% expected in 2023, making it one of the few countries for which estimates have not been revised.
All this poses real challenges for Japan. The IMF is forecasting stable growth of 1.7% in 2022 and 1.6% this year, the latter figure a downward revision of 0.1 percentage points since last summer. The economy is expected to be battered by a weakened yen, resulting in higher import costs, especially for energy supplies, and falling consumption because of those higher costs. According to one survey, food producers raised prices on over 20,000 products in 2022 and more than 7,000 others will see a price increase in the first quarter of 2023. The prices of 580 food products are set to rise in January alone.
Responding will be difficult. The government of Prime Minister Fumio Kishida has been weakened by scandals; four ministers have resigned and the popularity of the prime minister and his Cabinet is plummeting. The commitment to increase defense spending to reach 2% of gross domestic product will narrow the government’s options, although current conditions make it harder still to rationalize any increase in taxes to pay for the spending hike. Debt is sure to grow.
There is a limited amount that monetary policy can do given interest rate differentials between Japan and the major economies. As long as the Bank of Japan believes that inflation is temporary — the product of bottlenecks created by COVID-19 pandemic — and thus remains committed to a low interest rate policy to spur steady, consistent growth in prices, downward pressure on the yen will persist. Japan’s reopening to tourists will help but it will not be enough.
For its part, the BOJ shifted policy in December by widening the range in which government bonds could trade from 25 to 50 basis points. This was widely interpreted as the first move in an effort to end the bank’s promise to buy as many bonds as needed to keep interest rates low. BOJ Gov. Haruhiko Kuroda has denied that the move anticipates a policy shift, but many observers think he is laying the groundwork for his successor, who will take the reins of the bank in April when Kuroda steps down after a decade in office.
The problem is that there is little indication that the current bout of inflation is not temporary and that a virtuous circle of price and wage increases has been created. Without that, Japan’s economy will remain sluggish, if not stagnant. These conditions demand a deft hand at the BOJ and while Kuroda’s successor will be smart and experienced, it will still take time to adjust to being governor of the bank. A learning period is to be expected and that will invite concern if the Japanese government is simultaneously weak and uncertain.
In short, the year ahead promises to be bumpy and bruising. Politicians, policymakers and the public need to prepare, planning for both anticipated contingencies and the “unknown unknowns” that are sure to occur.
The Japan Times Editorial Board
