The economy looks strong. But these are the great risks to come.

The handy fruit of the pandemic economic recovery has been eaten. As a result, the expansion is entering a new phase – with new risks. ...

The handy fruit of the pandemic economic recovery has been eaten. As a result, the expansion is entering a new phase – with new risks.

For months, the global economy grew at a breakneck pace, as industries that had been closed during the pandemic reopened. While this process is barely complete – many industries are still operating below their pre-pandemic levels – the pursuit of recovery seems likely to be more gradual and, in some ways, more difficult.

The reopening of restaurants and theaters is one thing. Extraordinary safeguards in shipping networks and semiconductor shortages, among the most striking examples of supply shortages hampering many sectors of the economy, are harder to repair.

And a series of risks, including the difficult-to-predict dynamics of Covid variants, could deflect this transition to a healthy post-pandemic economy.

An imminent risk is that political leaders mismanage matters in the world’s largest and second-largest economies. Namely, in the United States, a deadlock on raising the federal debt ceiling could bring the nation to the brink of default. And in China, the fallout from property developer Evergrande’s financial woes raise questions about the country’s debt and real estate-fueled growth.

Last week, the Organization for Economic Co-operation and Development forecast that the global economy would grow 4.5 percent in 2022, from an expected expansion of 5.7 percent in 2021. Its forecast for states United are showing an even more marked slowdown, from 6% growth this year to 3.9% thereafter.

Of course, a year of 3.9% GDP growth wouldn’t be to be sneezed at – that would be much faster growth than the United States has experienced for most of the 21st century. But it would represent a reset of the economy.

“We’ve had take off, and now we’re at cruise altitude,” said Beth Ann Bovino, chief US economist at S&P Global.

After the global financial crisis of 2008-2009, the big challenge for the recovery was a drop in demand. Workers and productive capacity were plentiful, but spending in the economy was insufficient to make that capacity work. The post-reopening stage of this recovery is the opposite picture.

Now, there is a lot of demand – thanks to accumulated savings, trillions of federal stimulus dollars, and rapidly rising wages – but companies are reporting difficulty finding enough workers and raw materials to meet that demand. .

Dozens of container ships are saved in southern California ports, waiting their turn to unload products destined to fill the shelves of American stores during the holiday season. Car manufacturers have had to close factories for lack of semiconductors. Builders have struggled to obtain windows, appliances and other key products needed to complete new homes. And restaurants have reduced their hours for lack of help in the kitchen.

These constraints indeed act as a brake which slows the expansion. The question is how much and for how long this brake will be applied.

“The kinds of growth rates we’re seeing are rebounding from a very severe recession, so it’s no surprise that this doesn’t continue,” said Jennifer McKeown, head of the global economy department at Capital Economics. “The risk is that this is less of a natural cooling and more of supply shortages that are really starting to be felt. This may mean that economic activity does not continue to grow as we expect, as there is instead a freeze on activity and price pressures starting to rise. “

The problem is that supply shortages have many causes, and it is not clear when they will all decrease. Spending around the world, and particularly in the United States, has shifted to physical goods rather than services during the pandemic, faster than productive capacity could adjust. The Delta variant and the continued spread of Covid have resulted in production restrictions in some countries. And the delayed effects of production stoppages in 2020 are still being felt.

Then there are the risks lurking in the background – the kinds of things that are not widely predicted to be a source of economic distress, but could unfold in unpredictable ways.

The absurdity of the debt ceiling in Washington is a prime example. Senate Republicans insist they will not vote to raise the federal debt limit and that Democrats will have to do it themselves – while also planning to obstruct Democratic attempts to do so.

Failure to reach some sort of agreement would risk defaulting on federal obligations and causing a financial crisis. For this reason, an agreement in these cases has always been reached, although, as in 2011, this created a lot of uncertainty along the way.

The risk here is that both sides are so determined to stick to their positions that a miscalculation occurs, like two pilots in a chicken game who both refuse to swerve. And for those closest to shaping US fiscal policy, it looks like a significant risk.

“The chances of default are still low and Congress will likely raise the debt ceiling. but the path to a deal is darker than usual, ”said Brian Gardner, chief Washington policy strategist at Stifel, in a research note. He added that the political chicken game could scare the markets in the coming weeks.

And across the Pacific Ocean, the Chinese government has its own challenge, as Evergrande struggles to pay off $ 300 billion in debt.

Real estate has played a disproportionate role in the Chinese economy for years. But few analysts expect the problems to extend far beyond China’s borders. China’s banking and financial system is largely self-sustaining, unlike the deep global ties that allowed Lehman Brothers’ failure in 2008 to trigger a global financial crisis.

“Everyone has learned a tip or two since 2008,” said Alan Ruskin, macro strategist at Deutsche Bank Securities. “What you have here is the second largest economy in the world, and the one that lifted all the boats, could slow down more noticeably than people anticipated. I think that’s the main risk, rather than that financial interconnections move on a global scale. ”

All of this could lead to a chaotic fall for the global economy, but which, in the most likely scenarios, would lead to a strong 2022. Yes, that is to say, everything goes as expected by forecasters.

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Newsrust - US Top News: The economy looks strong. But these are the great risks to come.
The economy looks strong. But these are the great risks to come.
Newsrust - US Top News
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