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- China’s Evergrande is scaring markets and the global economy faces a series of threats that could derail the recovery.
- Soaring energy prices are disrupting production; in the background, the United States and China still do not get along.
- With growth slowing and prices hitting multi-year highs, economists are talking about the dreaded “stagflation”.
The Evergrande name becomes as famous in 2021 as the Lehman Brothers name was in 2008. The colossal Chinese real estate developer is faltering, threatening markets far beyond China’s borders. But as important as a $ 300 billion default is, it might just be the tip of the iceberg.
The global economy is grappling with higher prices, delivery delays and widespread shortages. The combination of these could even lead to great struggles to come.
Four main indicators are flashing red alarm signals, and they just might turn into something worse.
(1) The Evergrande saga shakes the world markets
Since the previously little-noticed US mortgage-backed securities market imploded in 2008 and brought Lehman Brothers with it, endangering the global financial system, economists have been on the lookout for the ‘black swan’ financial risk. and to its cousin, the “gray swan” rhino. “
Evergrande might be such a rhino, the kind of threat you’re aware of, but don’t consider her serious until her horns attack you.
After riding a wave of unbridled borrowing and rapid growth, the company faces a default of more than $ 300 billion, and a Chinese government determined not to get away with it.
Within weeks, Evergrande suffered a handful of credit downgrades, investor protests, last-minute fundraisers, and missed interest payments. The saga immediately shook the world markets. Stocks fell on fears that a possible default could hit the Chinese economy and, in turn, slow global growth.
Evergrande has less than a month to make late payments and avoid payment defaults. But as deadlines loom and the company struggles to raise funds, the global economy anxiously awaits a sign that the rhino rush is averted.
(2) US-China tensions threaten to turn into decoupling
The Chinese government’s tough stance on Evergrande is emblematic of its stronger stance on its corporate sector, an issue that has rocked stock markets on both sides of the Pacific.
The crackdown in China has hit major US-listed tech companies like the ridesharing app Didi, in addition to preventing the biggest IPO in history, from billionaire Jack Ma’s Ant Media group. The response of the United States has been to toughen its own registration rules.
The United States will soon unveil its trade policy with China, whose trade representative Katherine Tai told Politico she would “rely on” tariffs worth billions of dollars on imports Chinese.
“The era of blinders in pursuit of ever deeper economic engagement with China is over, and it will not return,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The decoupling of the United States and China could be another round of Trump-style tariffs, where the prices of Chinese imports skyrocket as companies pass the costs on to ordinary Americans, or it could be greater reconstruction of the global supply chain. China has also provided American businesses with cheap labor for decades. If companies look elsewhere for their manufacturing needs, higher production costs would further increase selling prices.
(3) Soaring energy prices destabilize economies
Decoupling means everything is more expensive, and the changes brought on by the pandemic and changes in regulatory behavior have made commodity prices much more expensive and less predictable to boot.
Global energy prices have skyrocketed this year as producers struggled to keep up with a rapid rebound in demand after major economies lifted COVID-19 restrictions. In Europe, natural gas prices have risen by more than 500% in the past year to reach record levels.
Oil prices have risen sharply as users shift away from natural gas and coal, with Brent crude rising about 90% in the past year.
Rising energy prices have been a key factor driving inflation to multi-year highs in advanced economies and prompting central banks to reconsider their stimulus plans. The Federal Reserve and the Bank of England have now said they may tighten monetary policy sooner rather than later, scaring markets.
Energy shortages have also disrupted production in China, weighing on the growth of the world’s second-largest economy and threatening the supply chains of large companies like Apple.
(4) The specter of stagflation
Experts fear that supply bottlenecks fuel a dangerous cocktail of weak economic growth, high unemployment and stifling price growth. This raises the greatest risk of all to the global economy: the dreaded “stagflation” last seen in the 1970s, when stagnant growth and inflation combined to wreak havoc on people’s livelihoods. millions of people.
Policymakers looking to curb inflation risk pushing unemployment even higher, while attempts to boost hiring with low rates could trigger even higher inflation. The situation is already baffling the experts. The rise in prices is “a function of bottlenecks on the supply side over which we have no control”,
Federal Reserve
President Jerome Powell told the House Financial Services Committee Thursday.
“As this continues, bottlenecks, hiring difficulties and other constraints could, once again, prove to be larger and longer lasting than expected, posing upside risks to inflation.” , he said Tuesday during another hearing in the Senate.
Evergrande is therefore quite simply the most visible risk facing the global economy. The iceberg in the way of recovery is larger than it first appears. The energy crisis, trans-Pacific decoupling, and the stagflation phantom are monsters lurking right under the waves.
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