oneill106_Yin LiqinChina News Service via Getty Images_china covid Yin Liqin/China News Service via Getty Images

Another Global Recession?

Between falling real incomes in advanced economies, China’s weakening outlook, and the uncertainties stemming from Russia’s war in Ukraine, there is more than enough reason to worry that the post-pandemic recovery is giving way to a downturn. But there is still much that policymakers could do to mitigate the blow.

LONDON – At the start of the year, I expressed concerns about the outlook for financial markets, owing to all the considerable uncertainties that I could identify, and to the many other potential risks that were not yet clear. This was after Russia had begun to mass troops on Ukraine’s border, but before it had invaded. Now that Russia has launched its war of aggression, it has been almost totally removed from the international economy and markets, and energy and food prices have spiked.

At the same time, Western central banks have undertaken a major shift in their policy stances, having finally dropped the idea that today’s inflation is a merely temporary phenomenon that would subside on its own. They are now deliberately tightening global financial conditions (by both unwinding their balance sheets and increasing interest rates), and this is adding to cyclical pressures on household incomes, and thus on the wider economy.

As if that weren’t enough, China’s economy – the world’s second-largest and ten times bigger than Russia’s – has been deliberately held back by the government’s “zero-COVID” strategy. And this comes on top of existing efforts to dampen excessive housing prices, reduce credit growth, and rein in business sectors (starting with major tech conglomerates) that are seen to be interfering with the government’s new “fairer growth” objective.

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