The refined egoism of the American economy affects the recovery of the world economy

【Ming dysprosium】

　　According to data released by the U.S. Commerce Department at the end of April, the U.S. real gross domestic product (GDP) fell 1.4% on an annualized basis in the first quarter of this year, far below market expectations of 1.1%, the first contraction since the second quarter of 2020.

Previously, in the fourth quarter of 2021, the annualized rate of real GDP growth in the United States was 6.9%, and the annual growth rate of 2021 was 5.7%, hitting a 38-year high.

The U.S. economy is facing multiple challenges including high inflation, labor shortages, supply chain disruptions, falling external demand, and the continued ravages of the coronavirus.

Global Inflation Made in America

　　After the outbreak of the new crown pneumonia epidemic, the global economy has twists and turns, and the United States has played a very big role in fueling the flames.

Today, the global inflation level is high, the economic growth of many countries and regions is sluggish, some countries are on the verge of economic collapse, and geopolitical conflicts are intensifying.

On this occasion, the United States released negative growth data for the first quarter of this year, which made people worry about the trend of US monetary policy.

　　Judging from the itemized data, the US economy is not as bad as the GDP growth rate seems, at least domestic consumption and investment are still relatively strong.

The Fed's monetary policy may not be affected by the first-quarter GDP data, and it still maintains a pattern of rapid and substantial interest rate hikes.

However, what does this rate hike cycle mean for the world?

　　An important background for the rapid and substantial interest rate hikes in the United States is the high global inflation rate.

Among them, the inflation rate in the United States has reached the highest level in 40 years, causing domestic dissatisfaction.

　　The formation of the current global inflation, mainly due to several factors.

One is the strong stimulation of flooding in the United States.

Since the outbreak of the new crown pneumonia epidemic in 2020, the United States has adopted a "big water release" monetary and fiscal policy, resulting in strong demand and asset bubbles, which is demand-based inflation.

The second is that the supply chain is not smooth. The impact of the epidemic and the shortage of labor have caused the supply chain of the industrial chain to break, which has led to higher costs. This is supply-based inflation.

The third is geopolitical conflict. Russia and Ukraine, as "important cities" for energy and food exports, are hindered in their supply, especially bringing energy and food tensions to Europe. This is inflation caused by sudden events.

　　All three factors are extremely closely related to the United States.

From the perspective of monetary and fiscal policy, after the outbreak of the new crown pneumonia epidemic in 2020, in response to the economic shutdown, the United States adopted unprecedented monetary easing and fiscal subsidy policies.

The reason for this is that, in addition to the ferociousness of the epidemic, 2020 happens to be an election year in the United States.

Due to the economic recession caused by the epidemic, Trump lost some people's hearts.

Therefore, after Biden was elected, the fiscal support policy was in full swing, bringing about high global inflation.

　　In 2020, almost all countries' economies will show negative growth, but the capital market in the United States has soared, showing a bizarre scene of "output has not increased, but wealth has increased".

Since the second half of 2014, the global commodity market has entered a six-year downward cycle. Except for a staged rebound in 2016-2017, it has been in a relatively sluggish state.

Since the second half of 2020, global commodities have started a bull market for nearly three years. Under the global economic shutdown, its growth rate will still be 10.5% in 2020 and as high as 30.3% in 2021.

When inflation is clearly high in 2021, Fed Chairman Jerome Powell happens to be re-elected.

He has repeatedly stressed that inflation is "temporary", making the Fed's rate hikes come rather late and only quite aggressively.

　　The knock-on effect is that the epidemic has caused the supply chain to be sluggish. The main container freight index has been at a high level, and the decline has not been obvious so far.

Although China has effectively prevented and controlled the epidemic and resumed work and production as soon as possible, which has greatly contributed and supported the smooth global industrial chain and logistics chain and stabilized prices, the United States has not stopped its trade war with China, but has continued to increase its weight.

After Biden took office, instead of normalizing the tariffs imposed by the Trump administration on Chinese goods, he continued part of his policy of containing China, and from time to time he made so-called "blacklists" to prevent Chinese companies from participating in international trade and investment.

Rising protectionism and conservatism in the US will only push up already high prices.

　　After the outbreak of the Russian-Ukrainian conflict, the prices of oil, natural gas, soybeans, edible oil, nickel and other commodities, which are already at historically high levels, have risen sharply. In just 4 months this year, the price has risen by 10.7%. Among them, oil, food, livestock, metals, etc. increased significantly.

The Russian-Ukrainian conflict has come to this point, and it has to be said that it is quite directly related to the strategic goals and actions of the United States.

In particular, the production of oil, natural gas and food in the United States is quite sufficient, and it is even a major exporter of these commodities, while European countries have been greatly impacted by the sharp rise in commodity prices, especially oil, gas and food, and must buy from the United States across the ocean. more expensive LNG.

US "brakes" the world suffers

　　The current hot topic in the global market is inseparable from "stagflation".

The so-called "stagflation" refers to the coexistence of stagnant economic growth and high inflation. It appeared in the West in the 1970s, causing a series of economic, social and political contradictions and putting economic policies in an extreme dilemma.

At present, the new crown pneumonia epidemic is still repeated, and the economic development order has not been fully restored.

Against this backdrop, with such high inflation, the world is worried about history repeating itself.

　　In March, the European PPI rose by 31.1% year-on-year, and the euro area CPI rose by 7.5% year-on-year.

Excluding the increase in energy and food prices, the core CPI in the euro zone increased by 3% year-on-year.

It can be said that the various inflation indicators in Europe have reached the highest level since the data.

The German PPI increased by more than 30% year-on-year, hitting the highest level since data became available in the 1970s; the CPI increased by 7.3% year-on-year, which was higher than the "stagflation" period of the 1970s, and even approached the inflation level during the two world wars.

As a result, some European countries have seen empty shelves and commodity price adjustments, causing dissatisfaction among the people and social instability events such as strikes and demonstrations.

　　When the world is facing the threat of "stagflation", the major economies should have further strengthened the coordination of monetary and fiscal policies to avoid the "sudden brakes" or "sharp turns" of monetary policies of major economies, resulting in serious negative spillover effects.

But the rapid rate hikes in the United States this year have become a given.

In this sense, what Connery, the US Treasury Secretary of the Nixon administration, said during the "stagflation" period, "the dollar is our currency, but your trouble" has been repeated in reality.

　　Looking back at the solution in the 20th century, the United States raised interest rates sharply that year, and although high inflation was suppressed, it also caused an economic recession.

Will this round of Fed’s possible balance sheet reduction and interest rate hikes bring the same result?

The market is extremely worried about this.

Regarding the impact of inflation, although Europe expressed a positive response, its policy space is relatively limited.

Japan remains accommodative.

Emerging market economies are raising interest rates early as early as 2021 to counter the impact of the Fed's policy shift.

But a more detailed analysis will reveal that the situation and policy space vary from country to country.

　　Thanks to the "severe medicine", the U.S. economy has recovered well. Although there are concerns, the impact of interest rate hikes on itself is still under control, especially the Fed can control the policy process itself.

Europe and Japan are difficult to follow, because the coexistence of "stagnation" and "inflation" is more serious than that of the United States.

As of the fourth quarter of 2021, the average two-year GDP growth rate in the euro area was 0.3%, far lower than the 1.6% before the epidemic; and since March, with the overall surge in commodity prices, the European economy has declined significantly.

For emerging market economies, the risks are even greater.

Although Brazil and other countries raised interest rates earlier, the inflation level was still higher than expected. As the Fed raised interest rates, its economic risks increased.

Some countries have even appeared in crisis, and the risk of debt default is rising.

Egoism is hard to come back

　　To push the world economy out of the crisis and achieve recovery, we must strengthen macro policy coordination among major global economies, which is a world consensus.

However, in the face of the chaotic global industrial chain and supply chain, rising commodity prices, tight energy supply, and escalating food crisis, the global economy is teetering on the brink of unbalanced and out of control.

In the Asia-Pacific region, the United States promotes the so-called "Indo-Pacific Economic Framework" to build an economic coterie that excludes China.

In Europe, the United States has been fueling the conflict between Russia and Ukraine, raising prices to deliver natural gas to Europe, and making war fortunes.

In the world, the four major grain merchants including ADM, Bunge, Cargill, and Louis Dreyfus have made a lot of money in the food crisis.

　　In the face of global calls to strengthen economic policy coordination and the threat of a global economic dip, the US is still stubbornly acting at its own pace.

The Fed has been accelerating interest rate hikes and shrinking its balance sheet. Can these delicate egoistic measures curb inflation and bring the U.S. economy back to normal?

Actually not sure.

　　From the perspective of the causes, this round of high inflation or the signs of "stagflation" is caused by a combination of factors, many of which are caused by the United States itself.

Without eliminating these factors, it may be difficult to solve all problems with monetary policy alone.

The global fight against the epidemic also needs more cooperation, communication and consensus, and on the basis of technological progress, the clinical testing and use of effective vaccines and effective therapeutic drugs should be promoted.

In the field of global trade and investment, protectionism and conservatism should be reduced, and the global logistics chain should be normalized and smoothed as soon as possible.

In the face of geopolitical conflicts, all parties need to cooperate and coordinate, persuade peace and promote talks, and minimize the impact.

In the face of multiple disasters, environmental protection policies and energy policies may have to re-examine their balance points and abandon some radical concepts and policies.

　　In the turbulent waves of a global crisis, countries are not driving their own small boats alone, but sharing a big boat with a shared destiny.

As the world's largest economy, the United States should abandon its economic egoism, adopt responsible economic policies, and control the spillover effects of policies. Intensity and rhythm, and work with other countries to promote world economic recovery.

(Author: Wan Zhe, a researcher at the Belt and Road Institute of Beijing Normal University)