Recently, inflation in the United States and the European Union has risen significantly, with the US CPI exceeding 7.5 percent for six consecutive months and the eurozone CPI hitting a new high of 10.7 percent. Over the past year, due to the impact of extremely loose global liquidity and supply chain bottlenecks, coupled with the Russia-Ukraine woes, global inflation levels have continued to rise, reaching the highest level in nearly 40 years and becoming the most severe round of stagflation since the 1970s. At the same time, with the withdrawal of temporary global COVID-19 relief measures, as well as the implementation of tight monetary and fiscal policies adopted in response to inflation, this has led to economic growth continuing to slow.
Compared to the 1970s, the current round of global stagflation involves a large number of countries, with the major developed countries represented by the Organisation for Economic Cooperation and Development experiencing varying degrees of stagflation. Among them, the US, the United Kingdom, Germany, Italy and Russia have the most significant stagflation. Furthermore, inflation levels are quite high. The current level of inflation in OECD countries continues to be higher than 8 percent, reaching the level of the "Oil Crisis" of the 1970s.
Additionally, global liquidity is rampant. After the outbreak of COVID-19, global interest rates in developed countries reached the lowest level since World War II.
The main factors contributing to the current round of global stagflation patterns are as follows.
First, commodity prices have surged. Comparing the period before the outbreak of the COVID-19 with the end of August this year — crude oil prices rose up to 31 percent, natural gas 296 percent, wheat as much as 48 percent and copper 33 percent. Energy, food and other commodity prices rose significantly. Under pressure from carbon reduction efforts, EU countries have increased the use of natural gas and other energy resources to replace and eventually phase out coal-fired power, resulting in natural gas, crude oil and other commodities surging dramatically.
Second are the global expansionary policies. In response to the impact of COVID-19, about 40 central banks around the world cut interest rates more than 50 times since March 2020, with the Federal Reserve, the Bank of England and the Bank of Canada lowering their policy rates to near zero, and emerging economies also implementing interest rate cuts. The US, European and Japanese central banks took measures to expand the scale of monetary policy operations, restart or ramp up asset purchase programs, and create targeted support liquidity tools. According to central banks' statistics, the Fed, ECB and BOJ balance sheets expanded by 77 percent, 46 percent, and 23 percent, respectively, in 2020. The global easing of liquidity pushed up the global leveraging ratio to a record high of 267 percent for countries providing statistics at the end of 2021, a sharp increase of 25 percentage points compared to 2019.
Third, economic growth lacks momentum. The key factor that currently strengthens global growth momentum is policy stimulus. However, the effect has not been particularly significant. Take the US as an example. Neither of the major stimulus packages launched under the administration of the current and previous presidents has done little to address either current global supply chain issues or the long-term growth drivers in the US.
Lastly is the problem of geopolitical turmoil. The current round of global stagflation has been affected by geopolitical turmoil, such as the Russia-Ukraine conflict, which has deeply affected global trade, investment, technology and talent exchanges. In particular, the rise in commodity prices brought about by the conflict has further worsened the global stagflation situation.
Unlike major developed countries experiencing different levels of stagflation, China's economic growth has slowed, but the inflation level is relatively moderate. As of the end of October, the cumulative year-on-year increase in China's 2022 consumer price index was only 1.9 percent — significantly lower than the 8.3 percent in the US and 7.6 percent in the eurozone.
China's inflation level is much lower than that of major developed economies, which can be mainly attributed to the following three aspects. First of all, the divergence between China's economic cycle and that of Europe and the US, and the slowdown in China's internal demand, which curbs overall price increases. Second, the current round of high global inflation is mainly driven by the sharp rise in commodity prices, which are impacting the Chinese economy in the form of imported inflation, as evidenced by a significant rise in the producer price index. Finally, China's CPI composition and major developed economies' CPI composition differ significantly. In China's CPI basket, the weighting of sectors such as housing and food are big, but price increases have not been burdensome.
At the same time, due to China's expansionary fiscal and monetary policies, China's economy is experiencing a slow stabilization. From January to October, the added value of China's enterprises above a designated size of 20 million yuan ($2.84 million) in revenue increased 4 percent year-on-year, 0.1 percentage point faster than that from January to September. In October, the added value of such enterprises increased by 5 percent year-on-year, 0.2 percentage point faster than that in the third quarter, and 0.33 percentage point higher month-on-month. Most importantly, with China updating its COVID-19 prevention and control measures, a stronger impetus will be injected into the Chinese economy as China's capital market will mount a strong response.
In sharp contrast, excessive inflation will force the US, the UK and the EU to adopt strict tightening monetary policies, which may also have negative effects such as puncturing the global asset bubble and triggering an international debt crisis. Affected by tighter liquidity, rising global interest rates and low economic growth, highly indebted countries are likely to erupt into economic crises. Among them, emerging markets with fragile domestic economies, sharp exchange rate depreciations, high short-term debt, and political instability have a higher probability of debt crisis.
Recently, the World Trade Organization estimated global trade to further decelerate in 2023, with an expansion of just 1 percent, and warned that "several key countries risk sliding into recession". In summary, the global economy has experienced a stagflation crisis, and China's economy is recovering slowly. China's role in the global economy will be crucial. At the G20 summit meeting in November, China and the US jointly pointed out that both countries should strengthen cooperation, coordinate macroeconomic policies and promote the recovery and development of the world economy. The history of economic development shows that the painful effect of stagflation is very significant. It requires the joint efforts of all countries to emerge from the economic recession caused by stagflation.
The views don't necessarily reflect those of China Daily.
The writers are Han Bing, senior research fellow at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, and Liu Rui, postdoctoral fellow at the institute at the CASS.
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