Commentary: The world economy catches some lucky breaks

SINGAPORE: The world economy’s challenges are formidable enough that even the so-so can be cheered. Developments that not so long ago would be seen as the bare minimum required to put a floor under dwindling growth are now regarded as encouraging. Grasping at straws? Thankfully, there may be more to it.

In recent days, Beijing has recalibrated a zero-COVID strategy that has been a major brake on commerce, and developed plans to rescue the collapsing property sector. Leaders of the United States and China set a more positive tone for relations after meeting in person on Nov 14.

Federal Reserve officials supported expectations that the most powerful central bank will shift to less gargantuan interest rate hikes, while the US dollar has lately retreated from the stratospheric levels that led to strains in global finance.

None of these amounts to a great leap forward for the global economy. They do address - even if temporarily - some of the big negatives.

Zero-COVID, which has seen large urban areas locked down and onerous curbs on travel, had become a proxy for whether China has the will to lift itself from the doldrums. 

“Xi’s team is committed to, once again, re-accelerating Chinese economic growth,” Ken Griffin, founder of the Citadel hedge fund, said on the sidelines of the Bloomberg New Economy Forum in Singapore last week. The damage done may last for years, but there is at least a tacit acknowledgement that the prior path was unsustainable.

SLOWING THE PACE

Still, there are substantial negatives. China's economy, which has been a boon to the world for decades, continues to struggle: Data released last Tuesday showed retail sales sagged and industrial output slackened.

The International Monetary Fund became gloomier about the state of the world, saying difficulties are “immense".

Policymakers are trying to navigate an unhappy combination of high inflation and sluggish growth. Food prices have been a flashpoint this year, with countries enacting a number of protectionist measures to curb shortages.

“All it takes is one really bad crop, let’s say in North America or South America, to really send prices higher,” David MacLennan, chief executive officer of Cargill, said at the Bloomberg New Economy Forum.

That makes what is going right, or at least not terribly, all the more worthy of attention. For those who spent the past few months sweating the dollar’s rampage and the risk it posed, especially to emerging markets, take note of Lael Brainard’s comments last Monday.

The Fed vice chair, someone with an especially keen feel for the global economy, signalled she favours stepping back from 75 basis point hikes as soon as next month. Christopher Waller, one of the most hawkish Fed governors, left the door open on Wednesday to backing 50 basis point steps. Mary Daly, president of the San Francisco Fed, told CNBC the same day that “the discussion is, rightly, in slowing the pace".

No, the Fed’s work isn’t done - nor is that of most monetary agencies - but the most intense phase of tightening looks more and more like it’s behind us.

That’s a message echoed by European Central Bank Governing Council member Francois Villeroy de Galhau. “Jumbo hikes will not become a new habit,” he told a conference in Tokyo last Tuesday. Minutes from the Reserve Bank of Australia’s Nov 1 board meeting indicated a high bar for returning to large hikes and even held out the prospect of a pause.

It’s becoming increasingly common to hear policymakers speak of lags and emphasise that rates have moved up quickly this year. This is code for seeking an opportunity to dial back the aggression and, next year, pause. Some economists see rate cuts in 2023 in part because faltering growth will damp prices.

While this might be seen as good news, it’s important to remember the context. Having been surprised in the prior decade by the relative absence of inflation, policymakers didn’t want to jump too soon.

Officials bet “on the wrong side” of inflation last year, Singapore’s Senior Minister Tharman Shanmugaratnam reminded us last week. Recession is the “price we pay", he said.

RESTORING THE NORMAL ORDER OF WORK AND LIFE

Nor will China’s economy suddenly switch to happy days. Its exit from the pandemic could run through the end of next year, with reopening only starting sometime from April and a slow return to normality, according to a recent survey of analysts. 

Zero-COVID hasn’t been banished, but merely reinterpreted. Officials have been urged to be more targeted with their restrictions, not abandon them. Still, the goal is reasonably clear: “Restore the normal order of work and life as soon as possible,” according to a Politburo statement on Nov 10.

The world economy isn’t in super shape. Mistakes have been made. But the past week has seen some important developments.

Tempting though it may be, don’t look only for the qualifiers. The brittle expansion has caught a few much needed breaks.