By Dafydd Rees
The International Monetary Fund has just updated its growth forecasts to take account of the impact of the War in Europe and the ongoing COVID lockdowns in China. It’s hard to think of a time of greater pessimism about prospects for the global economy. A Bank of America survey of fund managers, conducted in the past few weeks, found that 71% of investors expect to see a weaker economy over the next 12 months. It’s the most pessimistic finding ever- worse than during the Global Financial Crisis of 2008, or indeed the heights of the COVID-19 pandemic of 2020.
My worry is that these multiple threats aren’t being fully appreciated by politicians and policymakers in the UK, US and Europe as they take difficult decisions, especially the continuing impact of COVID on the world’s second largest economy.
Here in the UK, it is the cost-of-living crisis and the impact of inflation which will define the long-term political fortunes of the current UK Government. UK inflation is already at a 30-year high. The Office for Budget Responsibility expects it to peak at 8.7% in October. Food price inflation, according to Kantar, will reach 15% by the end of 2022. The respected independent forecaster, the Institute for Fiscal Studies, estimates that recent tax threshold squeezes introduced by the Chancellor, will serve to double inflation’s impact on the household budgets of ordinary voters.
The challenge facing the Ukraine is existential in nature. The UN says that a quarter of Ukraine’s population have been driven from their homes. The World Food Programme has been warning for weeks that we are facing a global food crisis, especially in East Africa, due to grain shortages caused by the War in Ukraine. The Governor of the Bank of England, Andrew Bailey, has already warned that the actions of the Russian leader will deliver an energy shock worse than that which faced the world in the 1970s. Yet by paying for Russian oil and gas, the developed world is providing funds to President Putin, responsible for Europe’s worst military conflict since World War 2.
There is a real sense that the world hasn’t woken up to the global economic threat of the slowdown in China. China facing its worst outbreak of COVID-19 in two years. Its economy is more than ten times the size of Russia, as a proportion of global GDP according to the World Bank. Research by Goldman Sachs has shown how global markets view this reality. Shares with high exposure to China are down 15% over recent months, while shares of companies with a close correlation with Europe, are down by only 4% in comparison.
The severe COVID lockdown in China is affecting close to 100 million people. In the past few hours, the Chinese Central Bank has published details of 23 measures designed to support infrastructure investment. Half of all business investment in China has been related to the property sector in recent years.
It’s hard to think of a time when more difficult economic choices faced the global economy at one time. A Deloitte survey of UK finance chiefs published this morning, has come to the same conclusion of the record level of risks and tough challenges that lie ahead. It is a brave politician who champions the benefits of globalisation and international trade against such a grim backdrop.