China News Agency, Beijing, July 23rd: Who is hurt the most when the global economy sounds a recession alarm?
China News Agency reporter Pang Wuji
"House seemingly endless rain".
This is a true picture of the recent global economy.
On one side is the “outrageous” inflation data in developed economies such as Europe and the United States.
The U.S. CPI rose 9.1% year-on-year in June, hitting a 40-year high.
The euro zone's June CPI also recorded a year-on-year increase of 8.6%.
Central banks have been forced to sharply tighten monetary policy to fight inflation.
On the other hand, multiple global crises such as food, energy, finance, and climate are superimposed, and people's livelihoods in some countries are threatened.
What happened to the global economy?
Are we heading into a recession?
In this regard, China News Agency's "East-West Question, China Dialogue" invited Bala Ramasamy, professor of economics and vice provost of China Europe International Business School, and Fernando Ramasa, chief financial officer of Premo, a well-known European electronic component manufacturer. Fernando Gomez, in a dialogue with Wei Xi, director of the Economic Department of China News Agency.
China News Agency's "East-West Question·China Dialogue" scene.
Photo by Zhai Lu
Rui Bolan believes that the global economy is heading for a recession, and this bad period may last 12-18 months.
Developing countries with a high degree of dependence on external resources such as energy may be hit the hardest.
To reduce the impact of the recession, governments need to collaborate and act together.
Gomez said the "symptoms" of the recession would show in the quarters after the summer.
As for China, he believes that although it will also be affected by the global recession - no country is immune, the Chinese government will act resolutely and decisively, and China will recover from the impact of the global recession faster and earlier than other countries. come over.
An excerpt from the conversation follows:
"Unfair Crisis"
Wei Xi: Recently, the United Nations issued a warning that we are facing a cost of living crisis that we have not seen in decades, including food, energy and finance. What is wrong with the global economy?
Rui Bolan: Now the world can be said to be in crisis.
The fallout from the Covid-19 pandemic has been a cost of living crisis, with a misalignment between demand and supply of commodities due to supply chain disruptions.
The Ukrainian crisis that erupted in February this year has added to already bottlenecked supply chains, especially in the energy and food markets.
This cost of living crisis is, in fact, a crisis on an unfair basis — a crisis in low- and middle-income countries, not a crisis in rich countries.
Rich countries can afford to pay higher prices for food, energy, etc., but low- and middle-income countries cannot.
The end result will be a growing gap between rich and poor across countries.
Current challenges will further exacerbate existing problems such as income inequality, poverty, political and social instability.
Gomez:
For the European market, affected by the new crown epidemic, Europe has experienced economic stagnation for more than a year.
Many sectors of the economy are closed, and logistics between Asia and Europe, as well as some manufacturing sectors, are experiencing bottlenecks.
This blockage of the supply chain, to some extent, increases the prices and costs of manufacturing, and these costs are ultimately passed on to the rest of the economy, fueling inflation and inflation expectations.
"Record inflation"
Wei Xi: The CPI in the euro zone rose by 8.6% year-on-year in June, hitting a new record high. What impact will this have on the lives of Europeans? Are you feeling the pressure of inflation?
Gomez:
Inflation is already having a big impact on European businesses and ordinary people.
The first is the rising input cost of the supply chain.
As prices rise, there are higher expectations for higher wages to compensate for some of the lost purchasing power, but this puts pressure on the structural costs of businesses.
The second is the decline in the purchasing power of consumers, and the decline in spending on investment and durable goods, which in turn affects business operations.
Rui Bolan:
Fundamentally, inflation occurs because there is a gap and a lag between demand and supply, and supply cannot keep up with demand.
This gap and lag continue to increase, and commodity prices naturally rise.
Data map
"Aggressive interest rate hikes by the United States and Europe will make developing countries suffer"
Wei Xi: Since the beginning of this year, the Federal Reserve has raised interest rates three times, and the euro zone has also raised interest rates for the first time in 11 years. Will this help control inflation and reduce living costs?
Rui Bolan:
We do not have many tools to control inflation, among which, raising interest rates is the most common way to deal with it.
But the question is: is it too late?
Because the danger of high inflation has actually existed since mid-2021.
The global inflation rate is now at the highest level since the 1980s, so the Federal Reserve and the European Central Bank have taken aggressive (interest rate hikes) measures in the money market.
But it could exacerbate inflation in some developing countries.
In developing countries, part of inflation is expected inflation.
But another bigger problem is currency devaluation.
When the U.S. raises interest rates, money flows out of developing countries, which depreciates their currencies and makes imports more expensive.
This means that developing countries not only have to bear the inflation caused by the gap between supply and demand, but also bear the pressure of imported inflation.
And unfortunately, developing countries do not have much means to deal with inflation and can only passively follow interest rate hikes.
The price to pay is that it could lead to a severe economic downturn.
"Euro depreciation could fuel inflation"
Wei Xi: Mr. Gomez, there are also concerns that rising interest rates will lead to a sharp fall in the euro. The euro recently fell to a 20-year low against the dollar. Are you worried that the devaluation of the euro will affect the company's business in Europe?
Gomez:
The devaluation of the euro caught both business operators and the ECB off guard.
In theory, a weaker euro is good for European exporters, whose products will be more competitive in the international market.
But as long as we buy non-euro-denominated goods, the depreciation of the euro increases import-driven inflationary pressures, most importantly natural gas and oil.
Therefore, a weaker euro would make inflation worse in Europe.
My point is that the market has moved faster than the ECB can react at the moment.
Therefore, monetary policy is lagging behind.
But even if the European Central Bank raises interest rates, the euro is unlikely to return to the previous level of 1.15, 1.20 against the dollar.
Also, in a country with high inflation, it doesn't matter what the exchange rate is because the currency is depreciating.
Frankly, I don't think they have any more "cards" to play.
Most likely, the situation deteriorates, with a recession in Europe in the coming quarters.
"The global economy is heading for recession"
Wei Xi: Is the global economy heading for recession? How long will it last?
Rui Bolan:
I believe we will enter a recession, because raising interest rates to control inflation is a "double-edged sword."
However, when we talk about these bad situations, it is important to remember that they will not last forever.
If the situation is bad, it may last 12 to 18 months.
If you look at the crises that have occurred in the past 50-60 years, on average, the bad period lasts about a year.
Gomez:
I think we're going to see the start of a recession in the quarters after the summer.
A recession has some negative connotations, such as: high unemployment, losses in the business sector, people suffering, etc.
But it is ultimately a balance.
We have already seen commodity prices start to drop sharply in June.
Wei Xi: How to deal with the global recession? Which countries are the most dangerous?
Rui Bolan:
The problems we face, such as inflation, are global, so what we need is a global solution.
If countries can come together and try to find a solution together and implement it in all countries, it will help solve the problem, but it will not be easy.
Circumstances vary from country to country, but no one can escape the problems facing the world today.
A big problem right now is soaring energy prices, and countries with natural resources may be better able to withstand economic downturns.
The situation is even more difficult for developing countries that rely on imports of resources such as energy, such as Sri Lanka.
"China's economy is expected to recover faster"
Wei Xi: What is your view on China's economic and social development?
Gomez:
I have lived in China for 6 years and have some understanding of Chinese society and economy.
The first is resilience.
I have seen the Chinese economy recover very quickly from the past few waves of the epidemic.
The resilience of the Chinese economy is something we don't see in many other places.
My expectation for the Chinese economy is that while it will still suffer from the effects of this global recession - no country is immune, I am pretty sure the Chinese government will act very decisively and resolutely.
In fact, some of these strong initiatives are already in place.
China will recover from the effects of the global recession sooner than other countries.
(Finish)