The Banking Executive Magazine - December Issue 2022

The Growing Threat of Global Recession… the BANKING EXECUTIVE 38 ISSUE 168 DECEMBER 2022 Having watched China for more than 30 years, I would say that one of its government’s biggest strengths has been its exceptionally good risk management. In the past, it has dealt with major potential problems deci- sively and in a timely manner. Not so today. If it doesn’t change course soon, there will be much more pain in store for its economy and for the rest of the world. On the other hand, if the government can abandon “zero-COVID” and some of its other more draconian economic crack- downs, growth could well rebound quickly. As for the rest of the world, two major factors beyond China will de- termine how things play out: major central-bank policies and Vladimir Putin. The Russian president’s inten- tions remain as difficult to predict today as they were three months ago when he launched his invasion. Fin- land and Sweden’s sudden support for joining NATO shows that Putin has miscalculated abysmally. Though he might not end the war, his stupidity may well result in his re- moval from power (though many Kremlinologists consider this un- likely). In any case, the blow to real incomes – and thus to consumer spending – from higher energy and food prices has been so large that central banks ought to think twice about their new- found hawkishness. After all, if the way to bring inflation under control is to weaken the economy, surging energy and food prices, together with tightening financial conditions, might have already done central banks’ job for them. To be sure, if longer-term inflation expectations are rising and no longer anchored, that would change the calculation considerably. In the United States, where the Federal Re- serve’s policy changes have far- reaching global effects, the latest Consumer Price Index shows core in- flation still above 6%, with service- sector price inflation accelerating. As such, the Fed might see little reason to abandon the tightening path that it has so loudly hinted at. But the Fed would do well to con- sider the reduction in real (inflation- adjusted) disposable incomes in the US. Though the decline hasn’t been as severe as in Europe, it has been significant, and the strong tightening of financial conditions may have al- ready sown the seeds for an eco- nomic downturn soon. So, are we heading into a global re- cession? Much will depend on the Fed, the Chinese leadership, and the erratic, isolated cipher in the Krem- lin.