The Banking Executive Magazine - December Issue 2022

ISSUE 168 DECEMBER 2022 the BANKING EXECUTIVE 37 With global problems varying be- tween decrease in real incomes in advanced economies, a not very pos- itive outlook for China, and the fears from the Russian-Ukrainian conflict, there is strong reason to worry that the post-pandemic recovery may convert to a recession. But there is still much that policymakers could do to mitigate the results. Many investors voiced concerns about the outlook for financial mar- kets due to the substantial uncertain- ties that they could pinpoint, and to other potential risks that were not yet clear. And by the beginning of March 2022, as the war between Russia and Ukraine started energy and food prices have spiked. In parallel, central banks and specif- ically in western countries have reached a conclusion to drop the be- lief that today’s inflation is a just short-term phenomenon that would subside on its own. They are now in- tentionally tightening global financial conditions (by both unwinding their balance sheets and increasing inter- est rates), and this is adding to cycli- cal pressures on household incomes, and thus on the wider economy. Adding salt to injury, China’s econ- omy – the world’s second-largest and ten times bigger than Russia’s – has been purposely held back by the government’s “zero-COVID” strat- egy. And this comes on top of exist- ing efforts to dampen excessive housing prices, reduce credit growth, and rein in business sectors. This global economic status, is an in- dicator that a global recession could occur. If so, it will have been remark- ably sudden, coming so soon after the lockdown-induced mini-reces- sions of 2020 and 2021. How bad will this downturn be, and are there policies that could avert it, or at least minimize its scale and severity? In China, policymakers are con- cerned that a less tight stance on COVID-19 could increase conta- gions and overcome the country’s urban hospitals. Since such scenarios have already happened indeed in other countries – particularly in the United Kingdom, which was obliged to enforce sudden, strict lockdowns in 2020-21 – China can hardly be criticized for being generally cau- tious. But the evidence suggests that Omicron (the dominant global vari- ant) is so transmissible that even lockdowns are unlikely to stop it completely. Moreover, it appears to be less virulent than previous vari- ants, which makes a strict response harder to justify. China’s blunt zero-COVID strategy comes on top of an already weak economy, so it has added to under- lying cyclical weaknesses. The most recent trade data (for April) show that Chinese imports remain exception- ally low – just one of many signals pointing to a weak economy. The problems facing China have im- plications extending beyond the economy and markets. China’s sin- gle-party leadership has long legit- imized its rule by delivering ever-rising living standards for the country’s 1.4 billion people. But this implicit pact cannot easily be sus- tained under conditions of persistent economic weakness. The Growing Threat of Global Recession…