Where’s the global economy heading to?

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Where’s the global economy heading to?
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THE world’s top central bankers, led by Federal Reserve chairman Jerome Powell, have warned that rising demand pressures and supply chain bottlenecks are continuing to hold back recovery of the world economy, and have helped to fuel more elevated price pressures as they have intensified.

It still appears that inflation is running beyond targets even as bottlenecks ease. No doubt, uncertainties still cloud the economic outlook as these factors gather with the more contagious Omicron variant.

Psychology is one reason the Fed is likely to signal a faster end to bond-buying and a quicker start to raising interest rates. This is about keeping inflationary expectations well anchored.Still, the mounting regulatory burden of US President Joe Biden’s executive orders will stifle growth. All the ingredients are present to turn the current inflation into stagflation. America’s experience with regulatory excess is both recent and painful.

There is an unusual surge in demand, not just constrained supply. Tighter monetary policy is therefore justified. But if you believe the Fed’s theory of how its asset purchases work, every bond it buys add fresh stimulus to the economy. It follows that merely tapering the pace of purchases is not really tightening.

Questions remain over the tightness in the job market, especially because it is hard to tell how many people might have left the workforce for good. Ending in November, the unemployment rate has fallen by one percentage point, to 4.2%. A stubbornly higher pace of inflation and much higher interest rates are widely seen as a likely legacy of the enormous stimulus by central banks and governments in response to the pandemic.

The recognition that strong expectations for the economy will require less monetary medicine beyond this year has stirred financial markets. It’s implausible zero-Covid policy continues to weigh on the economy as officials impose draconian lockdown with no warning whenever cases pop up. Harder to judge are the consequences of mounting official hostility to private companies in growing industries, such as tech. Slowing growth for now could be healthy if it’s the result of a transition to more balanced investment.

In my view, Japan is not an outlier – it is a harbinger. Many of the challenges it faces already affect other countries, or soon will, including rapid ageing, secular stagnation and the risk of natural disasters. Many Japanese people understand that responding to disasters is everyone’s problem, not just the state’s. Among the G7 countries, Japan has the lowest death rate from Covid-19 and the highest rate of double-vaccination.

Expertise in robots and sensors will help its firms make money from a wide range of new industrial technologies. Geopolitically, Japan plays a pivotal role between China, its largest trading partner, and US. China meanwhile eased monetary policy on Dec 20 by cutting its one-year prime lending rate in an attempt to stop the country’s economic growth slowdown from “gaining momentum”.

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