The new fault lines on which the world economy rests


TER pandemic caused a terrible economic slump, but now a strange, heady boom is in full swing. Oil prices have skyrocketed as restaurants and haulage companies struggle and flatter to recruit staff. With public companies signaling that earnings will hit an all-time high this year, stock markets are on the verge of tearing. An index from JPMorgan Chase and IHS Markit expects global growth to have reached its highest level since the gushy days of 2006.

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Every escape from Covid-19 is a cause for celebration. But today’s booming economy is also a cause for concern, as there are three fault lines beneath the surface. Together they will determine who is successful and whether the most unusual recovery in memory can be sustained.

The first fault line separates the jabs from the jab nots. Only those countries that receive gun vaccinations will be able to tame Covid-19. This is the prerequisite for shops, bars and offices to reopen permanently and for customers and employees to have the confidence to leave their homes. But only one in four people in the world has received a first dose of vaccine and only one in eight is fully protected. Even in America, some undervaccinated states are susceptible to the infectious Delta variant of the virus.

The second fault line runs between supply and demand. The scarcity of microchips has disrupted electronics and automobiles manufacturing precisely when consumers want to consume them. The cost of shipping goods from China to ports on the American west coast has quadrupled from pre-pandemic levels. Even if these bottlenecks are removed, newly opened economies will create new imbalances. In some countries, people seem to prefer to have a drink rather than work behind the bar, leading to a structural labor shortage in the service sector. House prices have risen, suggesting that rents will soon rise too. That could keep inflation going and heighten the feeling that housing is unaffordable.

The last break line is above the withdrawal of the stimulus. At some point, the government interventions that began last year will have to be reversed. Central banks of the rich world have bought over $ 10 trillion in assets since the pandemic began and are nervously considering how to break free without tightening capital markets too quickly. China, whose economy did not shrink in 2020, offers a sign of the future: this year it tightened its credit policy and slowed its growth.

In the meantime, state emergency aid programs such as increases in unemployment insurance and eviction moratoriums are running out. It is unlikely that households will receive another infusion of Stimies in 2022. The deficits are more likely to shrink than widen, which is a drag on growth. So far, economies have largely avoided a wave of damaging bankruptcies, but no one knows how well businesses will handle when emergency loans fall due and workers can no longer be given leave at taxpayers’ expense.

One would think that an event as extreme as a pandemic combined with the government’s unprecedented response would eventually spark an equally extreme global economic response. Pessimists fear a return to 1970s-style inflation, or a financial crash, or that the energy underlying capitalism will be drained by government handouts. Such apocalyptic outcomes are possible, but not likely. Instead, it is better to ponder the unusual prospect of examining how the three fault lines interact differently in different economies.

Start with America. With plenty of vaccines and tremendous stimulation, the greatest risk of overheating is. In recent months, inflation has reached a level not seen since the early 1980s. The labor market is coming under pressure from the shift in economic activity. Even after the number of jobs rose by 850,000 in June and numerous vacancies, the number of people employed in the leisure and hospitality industry is 12% lower than before the pandemic. Workers are reluctant to return to industry, which has driven wages up. The hourly wage is almost 8% higher than in February 2020. They may come back when the emergency benefits run out in September. But even countries without such a system, such as Australia, see a labor shortage. Attitudes towards work can change at the lower end of the income spectrum, with waiters and cleaners, not just well-heeled professionals who dream of yachts and sabbaticals. All of this indicates that America’s economy will overheat, with ongoing pressure on the Federal Reserve to tighten policies.

Elsewhere in the rich world the picture is less exuberant. These include some jab nots, like Japan, which has fully vaccinated less than 15% of its population. Europe is catching up on vaccines, but its lower incentive means inflation has not reached US levels. In the UK, France and Switzerland, 8-13% of workers were on vacation at the end of May. All of these economies run the risk of policymakers overreacting to temporary imported inflation and withdrawing support too quickly. If so, their economies will suffer, just as the Eurozone suffered after the 2007-09 financial crisis.

Low and middle income countries are in a tight spot. They should benefit from the increasing global demand for raw materials and factory goods, but they are struggling. Indonesia, battling another wave of Covid-19, is diverting oxygen from industry to hospitals. In 2021, the poorest vaccine-deficient countries are projected to grow more slowly than rich countries for the third time in 25 years.

Even if Covid-19 weakens their recovery, emerging markets face the prospect of higher rates at the Fed. This tends to put downward pressure on their currencies when investors buy dollars, increasing the risk of financial instability. Your central banks do not have the luxury of ignoring temporary or imported inflation. Brazil, Mexico and Russia recently hiked rates, and more places may follow suit. The combination of pricking too late and putting on too early will be painful.

Prepare to take shelter

The business cycle was hectic and left the slump well behind in just a year. By the summer of 2022, perhaps most people will be vaccinated, the business will have adapted to new demand patterns and the impulses will be orderly. However, watch out for those fault lines in this weird boom. â– 

dig deeper

Central banks face a daunting task: throttling without tantrums (July 2021)
Surprising inflation rates are increasingly driven by wages, not goods (July 2021)

This article appeared in the Leaders section of the print edition under the heading “Lines of Error in the World Economy”


About Ellen Lewandowski

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