Global recovery is sending flares as manufacturing takes a hit in Asia

As policy makers vie to claim the mantle of hawk-in-chief, spare a thought for what we like to think of as the recovery. It’s hard to think of an economy that’s traveling comfortably, let alone doing well. All the attention devoted to inflation slaying is muting some disturbing signs on the growth side of the equation.
 

Many central bankers say the best way to safeguard the economy is to contain price rises. They are really referring to prospects over the medium-to-long term. Their insistence on ratcheting up interest rates in big steps and lecturing about the bad old days of the 1970s — when borrowing costs were relaxed too soon and high inflation became entrenched — means that faltering growth now is a secondary concern, at best. 

Authorities aren’t quite saying an imminent downdraft is a fair price to pay. Perhaps they don’t have to. Some important ingredients are present, nonetheless. The past week has been a tough one for optimists: China’s export growth slowed dramatically in August and imports barely stayed the right side of zero. While Beijing’s strict Covid strategy bears some blame for this poor outcome, it’s worth remembering that trade had been a bright spot for China’s otherwise troubled economy even as some major urban centers were locked down. All that monetary tightening outside China — Beijing is scrambling to put a floor under growth — might be starting to bite. That’s the point.     

A weakening global picture is hurting the place that so often made world growth look good. Beyond China, powerhouses in Asia are suffering. Surveys of purchasing managers in Taiwan and South Korea showed manufacturing contracting. Factories tapped the brakes in Japan, too, but remained in expansion mode.

So profound has been the shift to inflation-fighting in the euro zone that it was easy to miss the significant cuts to growth forecasts unveiled by the European Central Bank on Thursday. Gross domestic product will likely increase 0.9% in 2023, the ECB said, a projection that is still more optimistic than most predictions. Bloomberg Economics sees an advance of only 0.4%. The region’s energy crisis makes a contraction before the end of next year a fair bet. None of this is deterring the ECB from entertaining another jumbo rate hike to follow Thursday’s 75-basis point move. “Inflation remains far too high,” ECB President Christine Lagarde said. 

Federal Reserve chair Jerome Powell stuck to his hawkish line the same day, speaking of the need to act “forthrightly, strongly.” He broke little new ground, but hardened expectations of a third consecutive 75-basis point hike next week. Will anyone stand up for growth or countenance the prospect of overkill? That’s what makes a speech the previous day by Lael Brainard so interesting. The Fed vice chair didn’t break with the party line, nor could she be expected to, but she did shade around the edges of the bank’s uber-hawkish stance. 

Brainard said borrowing costs need to turn restrictive, while conceding risks would become more two-sided in the future. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with over-tightening,” she told a conference in New York. Brainard is probably the most internationally minded member of the Fed’s leadership team. She was the Treasury’s top financial diplomat and has tried to steer the central bank to a greater appreciation that what happens beyond America’s shores matters.

When she was chair, Janet Yellen took umbrage with the idea that economic expansions die of old age. That’s a myth, she declared in 2015 after the Fed hiked rates for the first time in almost a decade. Her predecessor, Ben Bernanke, has quipped that central banks tend to murder them. Will the current global version survive infancy, much less reach adolescence? If not, post-Covid supply-chain travails and inflation should be added to the rap sheet. 

China’s economy pulled out of 2020’s tailspin sooner than its peers and had a robust year to follow. That reflation has run its course, and policy makers across the globe should be more concerned. The almost uniform desire to “front load” tightening is likely accelerating a downturn that just seems to be shrugged off as the price of doing business. The workshop of the world is sending an S.O.S. 

If you want some bucking up, read Brainard’s speech. At least someone is paying attention.