The 'headwinds' threaten the recovery of the world economy

The Delta variant, the US debt ceiling, the Chinese energy crisis and the escalation in commodity prices are preventing a return to the global economy.

The global economy is entering the final quarter of 2021 with many factors threatening to slow the post-pandemic recovery and proving that policymakers' soft view on inflation is wrong.

Widespread Delta variant disrupts reopening plans. US lawmakers debate debt ceilings and spending plans. China is suffering from an energy crisis and the effects of regulatory tightening, while the potential risk of an Evergrande Group crisis remains.

Escalating fuel and food costs worldwide, combined with logistical bottlenecks and strained supply chains, have increased price pressures. Labor shortages continue to occur for some businesses.

Although the reopening process is still underway, the current context is raising concerns about a combination of weaker growth and faster inflation, which threatens to affect the stimulus efforts of the country. central banks without disturbing the market.

"Expectations for a quick exit from the pandemic have changed," said Frederic Neumann, head of Asian economic research at HSBC Holdings in Hong Kong. "Full recovery will be measured in years, not quarters, as previously predicted."

Crisis in China

China is facing a widespread electricity crisis , forcing factories to limit production and prompting economists to cut growth forecasts. Bloomberg Economics believes that the power shortage will be a major blow to the process of reopening to China.

The affected regions represent about two-thirds of the country's economy, including the top five provinces in terms of gross domestic product, such as Guangdong, Jiangsu, Shandong, Zhejiang and Henan. One of the early signs of an impending crisis was that manufacturing activity in September fell for the first time since the pandemic began.

This development, combined with drag from the Evergrande crisis, the world's most indebted developer, and a broader downturn in the housing sector are weighing on China's economy. Beijing's push for tighter regulations on industries, including technology, is also worrying investors.

 

While the service sector grew again, China's manufacturing sector shrank for the first time since the outbreak of the pandemic. Photo: Bloomberg

Food and energy prices escalate

China's energy problems will not stop at growth. This also risks triggering a spike in food prices, Bloomberg said, as the energy crisis means the country is experiencing a tough harvest season from corn and soybeans to peanuts and cotton.

Over the past year, Beijing has imported a record amount of agricultural products due to domestic shortages, sending global food prices and costs to multi-year highs.

The food price index has increased by 33% in the past 12 months. At the same time, the prices of energy fuels such as gas, coal and electricity are also hitting records.

The prices of natural gas, coal and oil have surged in recent months. Photo: Bloomberg

Oil prices surpassed $80 per barrel for the first time in three years, and natural gas is at its most expensive level in seven years. Patrick Pouyanne, CEO of TotalEnergies SE, said the gas crisis affecting Europe is likely to last all winter.

The energy price crisis could get even worse. Analysts of several major US banks are telling clients that there is a possibility that oil prices will hit $100 and cause an economic crisis.

Supply chain pressure

The Delta variant also raises another concern, affecting global trade flows. It also helps to explain why congestion is increasing at major crossroads for international trade, from ports in Shanghai and Los Angeles, to the rail system in Chicago and warehouses in the UK.

Los Angeles - Long Beach port area, the gateway to import goods from Asia to the US, recorded a record high number of container ships waiting for unloading. Photo: Bloomberg

Retailers, including Costco Wholesale in the US, are ordering everything they can to ensure their shelves are always stocked, especially with the year-end shopping season approaching.

However, manufacturers are having a hard time sourcing critical parts such as semiconductors, chemicals and glass.

Dubai's DP World, one of the world's largest port operators, forecasts that the bottlenecks that have affected global trade flows will continue for at least another two years.

In addition, labor shortages in some industries are also becoming a concern for many companies.

Policy and monetary issues

The problems also stem from the economic policy of the US, the locomotive for the global economic recovery. While President Joe Biden just signed an emergency bill aimed at preventing the US government shutdown, negotiations on the sidelines continue to be difficult, with bipartisan disagreement.

US Treasury Secretary Janet Yellen previously warned the US government would run out of ways to pay the bills by October 18. If Congress doesn't raise the debt limit by that deadline, the government risks defaulting on its debt, causing millions of job losses, disrupting welfare programs, and crashing financial markets.

Globally, room to support fiscal policy is also shrinking as governments take on their biggest debt since the 1970s.

President Biden and Yellen must also decide whether to hand over a second term to Federal Reserve Chairman Jerome Powell, a decision that, according to Bloomberg , could also rock the markets.

For Powell and his international counterparts, the combination of slowing growth and rising inflation is becoming a major challenge. For now, Fed President and European Central Bank President Christine Lagarde are expressing cautious optimism that inflation will ease. But economists are questioning when inflation will become a long-term problem.

Minh Son ( according to Bloomberg )

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