Looking ahead to 2022: Two pictures of the global economy

The global economy is still in the shadow of the new crown epidemic, and how the epidemic evolves in the future will determine the picture of the global economy in 2022. Under the optimistic epidemic situation, the global economy will enter a rapid, but more turbulent and uneven recovery; under the pessimistic epidemic situation, economic stagnation and double-high PPI and CPI may coexist. This will be the first time since the two oil crises. Another true global stagflation. In response to the complex and volatile situation, China’s monetary policy, especially the fiscal policy, will exert force in 2022, and the intensity may exceed market expectations.

The fourth wave of the global epidemic

Since the outbreak in the spring of 2020, the global new crown epidemic has experienced three wave cycles: the first wave started in the spring of 2020, driven by the epidemic situation in Asia, America, and Europe, and reached its peak at the end of 2020; the second wave was mainly caused by the Indian Delta virus Promoted, since February 2021, the number of new crown cases in Asia has surged and driven the global epidemic, and the global new cases will peak from April to May 2021; the third wave will start from the end of June 2021, and new cases will be in August 2021 It rose rapidly and peaked during the Tokyo Summer Olympics and Summer Paralympics in September.

Since October 2021, the epidemic has entered the fourth wave of rising. Judging from the distribution of new cases globally, the fourth wave of the epidemic mainly occurred in Europe. Not only are new cases rising rapidly in the core European countries (Germany, France, Italy, Spain, the United Kingdom, and Russia), but the outbreak appears to be more severe in Europe’s peripheral countries, where the proportion of new cases in the total number of new cases in Europe has increased from 2021 20% in July this year rose to nearly 60% since November.

For now, the fourth wave appears to be primarily a European phenomenon. In Asia, the epidemic situation in Confucian cultural circles such as China, Japan and South Korea has been well controlled; even in India, which has the same large population and cases, the number of new cases has dropped from tens of thousands a day in August to thousands recently. In the Americas, the United States, as the “big epidemic”, although its daily new cases are still as high as more than 100,000, it has been significantly lower than the peak of the third wave of the epidemic in August and September. New cases in Mexico, Brazil and Argentina The increase in cases is significantly smaller than their peaks in July and August.

How the fourth wave of the epidemic evolves currently depends on two factors: first, the recent impact of the Omicron virus in South Africa. The outbreak of Omicron virus has caused the number of new cases in South Africa to soar from hundreds to over 10,000 per day, and the Omicron virus is spreading rapidly to Europe and the Americas, which may contribute to the fourth wave of the epidemic. Second, the Beijing Winter Olympics and Winter Paralympics from the end of January to mid-March. According to the experience of the 2021 Tokyo Summer Olympics and Summer Paralympic Games, the number of new cases in Japan has grown from 1,000 daily cases before the Olympic Games to over 10,000 or even more than 20,000 cases per day during the Olympic Games. The number of new cases also returned to previous levels. It can be seen that the third wave of the epidemic in Japan and the world at that time was synchronized with the opening and closing of the Olympic Games, and the pressure of epidemic prevention and anti-epidemic in the future Winter Olympics cannot be ignored.

Unequal recovery of the global economy

Due to the impact of the epidemic and the differences in the economic conditions and fiscal and monetary policies of various countries, the economies of various countries have shown the characteristics of unequal recovery since 2021. The impact of the epidemic on the economy occurs on both the supply side and the demand side. In the era of economic globalization, the impact on the supply side is global. After the second wave of the epidemic in April 2021, almost all countries experienced PPI inflation due to disruptions in global supply chains. However, there are regional differences in demand-side shocks. Due to the different impacts of the fourth wave of the epidemic on different countries, and due to the great differences in the economic fundamentals and fiscal and monetary policies of various countries, the speed of recovery of aggregate demand is different, resulting in large differences in the speed of CPI rise.

PPI mainly reflects the supply shock of supply chain interruption, and CPI mainly reflects the degree of demand recovery. According to the changes in PPI and CPI, the conditions of major economies can be roughly divided into three categories:

First, soaring PPI and much lower CPI. This situation is typical of Europe, where the fourth wave of the epidemic is the worst, and is also characteristic of most countries around the world. Taking Germany, the core country of the euro zone, as an example, the German PPI rose from 1% at the beginning of the year to nearly 20% in October, while the CPI only rose from 1% in the same period to 4%, and the scissors gap between PPI and CPI was as high as 14 percentage points (Figure 1). ). In addition to the difference in gains, other European countries. For example, there is also a huge scissors gap between Russia’s PPI and CPI. In October, Russia’s PPI was as high as 27%, but the CPI was only 8%, a difference of 19 percentage points.

In Europe, the high PPI is the common result of the rupture of the global supply chain and the local supply chain, while the relatively low CPI is because the fourth wave of the epidemic has seriously affected the recovery of aggregate demand, and on the other hand, Europe’s fiscal currency Policy expansion has been relatively modest than in the United States, and emerging economies, including Russia, have even raised interest rates several times.

Second, a high PPI and an almost equally high CPI. This occurs mainly in the major economies of the Americas. Taking the United States as an example, the PPI rose from 2% in February to 9% in October, while the CPI rose from 1% to 6% in the same period. level (Figure 2). The southern neighbor of the United States, Mexico, also showed similar characteristics. In October, Mexico’s PPI was 7% and CPI was 6%, only 1 percentage point difference between the two. In fact, for several months in 2021, the CPI in Mexico is even higher than the PPI.

In the Americas, as in Europe, the high PPI comes from the impact of the global supply chain, and the equally high CPI is due to the relatively small impact of the fourth wave of the epidemic on the Americas, and the unprecedented impact mainly in the United States. expansion of fiscal and monetary policy. Different from the macro rescue policy that focused on the corporate side after the epidemic in China, the fiscal and monetary policy of the US expansion has the characteristics of “consumer-friendly”: the Federal Reserve prints money to buy government bonds, the US Treasury issues bonds and then issues consumer coupons to consumers, and the US consumes Those who lie at home buy goods from around the world, especially China.

Third, soaring PPI and extremely low or even deflationary CPI. This mainly occurs in a few countries such as China and Japan with severely aging populations or even negative population growth. Taking Japan as an example, Japan’s PPI rose from -1% at the beginning of the year to 8% in October, while the CPI went from -1% to 0 in October, and the scissors gap between PPI and CPI was 8 percentage points (Figure 3). China’s PPI has risen to 13.5% in October. Although it has not fallen into CPI deflation like Japan, the CPI in October is only a weak 1.5%, and the scissors difference between PPI and CPI is similar to that of Germany (Figure 4).

The weakness of Japan’s CPI is a continuation of the long-term stagnation and deflation of the past few decades, which is behind an aging population and negative population growth. As we have pointed out in previous reports on Japan, large and persistent aggregate demand policies are difficult to work, both because of severe demographic problems and because policies have long been in the wrong direction (subsidizing pensions and infrastructure investment), with only minor changes recently. China’s extremely low CPI also reflects the challenges posed by demographic issues, but a major recent factor has been macroeconomic policies that differ from other major economies: tight fiscal policy, tepid monetary policy, and rapidly shrinking real estate policy.

In previous reports, we have pointed out that since 2021, fiscal revenue has increased significantly, fiscal expenditure has decreased, and fiscal policy has actually tightened; in the three years from 2018 to 2020, monetary policy has been cut three times a year, but only in 2021. At one point, the monetary policy was tepid; in this context, the tightened real estate policy since June led to a reversal of the real estate industry, and the original two-legged recovery model of “export + real estate” suddenly lost one leg .

Two pictures for 2022

Looking ahead to 2022, the most important factor affecting the global economic recovery is of course how the new crown epidemic evolves. At present, it seems that the fourth wave of the epidemic is likely to continue until the spring of 2022. Therefore, the evolution path of the epidemic after the spring of 2022 is crucial, which not only affects the recovery of the global supply chain and the total economic demand of various countries, but also determines the fiscal and monetary policy responses of major economies. For the epidemic situation in 2022, we can imagine two scenarios, pessimistic and optimistic.

The first is the most pessimistic scenario, which is roughly analogous to the first wave of the global outbreak that occurred last spring to the end of the year. It is assumed that the Omicron virus outbreak and the spread of the Winter Olympics are superimposed on each other, and the fourth wave of the global epidemic will spread from Europe to other major economies, and the duration will be extended beyond the second half of 2022. In this scenario, not only the supply chains of major energy and commodity exporting countries will be affected, but the Asia-Pacific supply chain centered on China and dominated by manufacturing may also be disrupted.

Under the pessimistic scenario, the global economic picture after the spring of 2022 may be: first, dual inflation of PPI and CPI. Rising energy and commodity prices drive global PPI to continue to rise, and disruptions to manufacturing supply chains will also hit the supply of manufacturing and final consumer products. Similar to the CPI inflation that occurred in China when the epidemic broke out in early 2020, the reduction in supply exceeded the reduction in demand caused by the epidemic blockade, which in turn caused the CPI to rise rapidly; second, the real global stagflation. When the PPI and CPI double inflation, the epidemic caused the economy to shrink, and the expansionary fiscal and monetary policy had to be continued to strengthen the inflation trend. The result was a global stagflation. Another true global stagflation; third, commodity prices continue to strengthen, as the world’s ultimate safe asset, the price of gold has regained its upward channel, and equity assets have been hit hard.

The second is the most optimistic scenario, which is roughly analogous to the Spanish flu from the spring of 1918 to the spring of 1920. The Spanish flu broke out in the spring of 1918. After three waves, causing the death toll of 20 to 100 million people worldwide, it suddenly and mysteriously disappeared in the spring of 1920 two years later. Suppose this round of the new crown epidemic is also similar to the Spanish flu, peaking in a fourth wave in spring 2022 after two years, and then gradually fading.

Under this optimistic scenario, the global economic picture after the spring of 2022 is likely to be: first, PPI inflation slowly subsides, CPI rises accelerate, and the global economy enters a fast, but more unequal, recovery path. Between developed and developing economies, aggregate demand in the former will recover faster, while in the latter, the pace of economic recovery will be slower due to lower vaccination coverage and more constraints on fiscal and monetary policies; Europe is the center of the fourth wave of the epidemic, and the pace of recovery is slower than that of other developed economies, especially the United States, while the pace of recovery in the United States will be abnormally fast; second, due to the difference in the pace of recovery, the Fed will raise interest rates earlier. This will have an impact on the recovery of other countries. If the epidemic is stabilized, with the rapid rise in CPI, the pace of the Fed’s rate hike may be significantly advanced from the original market expectation in June 2022, such as March 2022, which will constrain other major economies including China. Loose monetary policy, especially interest rate cut policy, but the most affected will be emerging and developing economies with a slower recovery process and greater reliance on dollar liquidity; third, global asset prices will also undergo major adjustments, but with The pessimistic pandemic scenario is just the opposite. The dollar strengthened, gold and commodities weakened, and the currencies of energy and commodity exporting countries (such as Australia and Russia) and countries with habitual current account deficits (such as Brazil and Argentina) depreciated to a large extent.

The evolution of the epidemic in any scenario is a complex and severe challenge for the Chinese economy. The impact of the pessimistic scenario is self-evident. Even under the optimistic scenario of the epidemic, it is necessary to pay attention to the constraints on China’s monetary policy caused by the Fed’s advance rate hike, as well as the global asset price turmoil caused by the Fed’s rate hike. As far as domestic factors are concerned, how to fill the growth gap formed after real estate regulation is worth serious consideration.

Judging from the new sales of real estate nationwide in 2021, it will be lower than the same period last year since July, entering a stage of negative growth; judging from the new investment in residential development nationwide in 2021, September is already lower than the same period last year, and further declines in October. Although the real estate policy has been eased recently, under the background of negative population growth and the policy of not speculating on housing and housing, the best situation for real estate investment in 2022 can only be stable, and the probability of negative growth is very high. All parties estimate that the contribution of real estate to GDP is between 20% and 30%. Therefore, if real estate investment grows negatively, it means that the loss of GDP growth rate may be as high as 2 percentage points. Closing the gap will be a key part of stabilizing the economy in 2022.

The optimism is that, unlike other major economies, China’s monetary policy, especially fiscal policy, has a considerable reserve of “bullets”. In preparation for the 20th National Congress of the Communist Party of China, fiscal spending in 2022, especially in traditional infrastructure and so-called new infrastructure including new energy, may greatly exceed market expectations. Of course, no one has ever calculated whether the fiscal multiplier of infrastructure investment (the increase in GDP driven by unit fiscal expenditure) is large or small.

In fact, if the relevant departments can further broaden their policy thinking, from focusing on the corporate sector to focusing on the residential sector, from focusing on investment to focusing on consumption, and from focusing on material reproduction to focusing on the reproduction of human beings, then not only financial multiplier The number may rise rapidly, and the effect of the policy will change from doing more with less to more with less. Moreover, there are three long-standing structural defects in China’s economy, namely, the proportion of residents’ income to national income is too low, and the proportion of residents’ consumption to total demand is too low and effective. The increasing scarcity of labor relative to the capital stock will be effectively addressed.