In China and Europe, the work of policy super stimulus is not over yet

computer chips, inflation, Omicron Covid-19 variant, global demand, machine tools, 27.1 per cent, 32.2 per cent, dual circulation, Evergrande crisis, pandemic worries, 64.8 per cent, 6 per cent

The global economy still has a lot of catching up to do as the world bounces back from the Covid-19 pandemic. The first phase of recovery has been spectacular, with growth expanding exponentially in the first half of 2021 with so much pent-up demand coming back on stream after the lockdowns, factory closures and world trade dislocations of 2020.

The second phase of recovery looks a lot less certain, though. Supply-side logjams are taking longer to unwind, with global production still hamstrung by capacity constraints, labour shortfalls and a dire shortage of essential manufacturing components such as computer chips.

And new obstacles are emerging that may impede the recovery, not least the impact of rising inflation and the fear of central banks striking back with interest rate tightening sooner rather than later.

The emergence of the new Omicron Covid-19 variant could not have not come at a worse moment. It’s a major headache for global policymakers conflicted about whether to keep nurturing the shoots of recovery and risk higher inflation, or face down inflation at the risk of strangling recovery. The world is not out of the woods yet by a long stretch.

There’s still a huge backlog of global demand waiting to be met, and China and Germany are both uniquely positioned to fill the gap as normal business conditions return. Whether it is consumer goods, machine tools or manufacturing raw materials, the world’s two leading net exporting nations stand to profit as supply-chain logjams gradually ease.

It has already shown up in some breathtaking export growth performance for both countries this year, but the worry is that the trade boost is already levelling out. The latest data from the CPB Netherlands Bureau shows world trade growth has decelerated sharply, from a peak of 21 per cent, year on year in June, down to 7.4 per cent in September.

As the impact of export-led recovery fades, policymakers will need other parts of the economy to pick up the slack. The work of policy super stimulus is not over yet.

computer chips, inflation, Omicron Covid-19 variant, global demand, machine tools, 27.1 per cent, 32.2 per cent, dual circulation, Evergrande crisis, pandemic worries, 64.8 per cent, 6 per cent

A worker in protective overalls walks near containers on a ship in Qingdao, in east China’s Shandong province, on November 7. China’s export growth slowed slightly in October to 27.1 per cent from a year ago. Photo: AP

Germany’s economy already seems to be feeling the pinch, with the year-on-year rate of export growth tumbling from a peak of 47.4 per cent in April down to 7.2 per cent in September, with the trend pointing to weaker growth ahead.

Germany’s traditional model for export-led recovery is faster trade growth, feeding into stronger demand for business investment, faster job creation and ultimately stronger consumer spending down the line. If export demand is starting to falter, that’s a cause for concern.

With German business conditions slipping, retail sales growth in negative territory and third-quarter economic growth sinking to 2.5 per cent year on year, from 10 per cent in the second quarter, it’s no surprise that long-awaited interest rate hikes from the European Central Bank might be postponed until 2023 despite the resurgence of inflation.

computer chips, inflation, Omicron Covid-19 variant, global demand, machine tools, 27.1 per cent, 32.2 per cent, dual circulation, Evergrande crisis, pandemic worries, 64.8 per cent, 6 per cent

People watch a merry-go-round at the Christmas market in Bremen in northern Germany, on November 25. The nation’s third-quarter economic growth sank to 2.5 per cent year on year. Photo: EPA-EFE

There are parallels for policy perceptions in China. The country’s export performance still looks highly impressive, with the year-on-year growth rate only moderating to 27.1 per cent in October from 32.2 per cent in June. But, given background world trade trends, a weaker contribution to growth from China’s external sector is looking more likely.

This shouldn’t be too much of a worry though, as Beijing’s objective under its dual circulation strategy is to shift focus from exports and promote faster domestic-driven growth. This may be tough to deliver in the short term while consumer confidence is being overshadowed by the impact of the Evergrande crisis and ongoing pandemic worries.

China’s consumers are key to the outlook. With consumer demand the biggest driver for China’s economy, accounting for 64.8 per cent of gross domestic product, it’s imperative that Beijing keeps monetary and fiscal policy conditions as loose as possible.

computer chips, inflation, Omicron Covid-19 variant, global demand, machine tools, 27.1 per cent, 32.2 per cent, dual circulation, Evergrande crisis, pandemic worries, 64.8 per cent, 6 per cent

Consumer confidence might have bounced back to 121.2 in September from August’s downbeat 117.5 level, but sustaining it is vital. Annual retail sales growth rose to 4.9 per cent year on year in October but consumer spending must be stronger longer term if Beijing wants GDP growth to come close to 6 per cent in 2022.

It’s no surprise that the pendulum is switching towards the possibility of lower interest rates as the next step in China. It’s a risky gamble when the US is on the brink of tighter money policy, but it may be inevitable.

David Brown is the chief executive of New View Economics

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