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The global economy has picked up, after a period of stagnation caused by the novel coronavirus pandemic. To maintain stable growth this year, it will be essential for governments and central banks to implement appropriate policies.
For 2021, the real economic growth rates of the United States, the eurozone and China are expected to have exceeded 5% across the board, and the world as a whole is likely to have recorded high growth of 5.6%.
The rapid spread of the omicron variant is a cause for concern in 2022, but the global economy is currently expected to grow at a solid 4.5%.
Focus on Fed
The global economy has been boosted by the monetary easing policies implemented as a measure against the economic effects of COVID-19.
In March 2020, the U.S. Federal Reserve Board introduced a quantitative easing policy to supply funds to the market by buying government bonds and other securities, as well as a virtual zero interest rate policy. The European Central Bank and others have also expanded their quantitative easing policies.
While such decisive responses to the crisis are commendable, the side effects are becoming increasingly difficult to ignore — especially, inflation.
The U.S. consumer price index in November last year rose 6.8% from the same month the previous year, the largest increase in about 39 years.
Funds put into the market as a result of monetary easing policies have been directed into stocks and a wide range of other investment targets, and this — combined with the increased demand associated with the economic recovery — has caused the prices of raw materials such as iron and copper, as well as crude oil and foodstuffs to soar.
Another factor behind the high prices is supply constraints, in which the provision of goods and services is being hindered by labor shortages, stagnant logistics and difficulties in procuring semiconductors. Inflation is not limited to the United States, but is spreading to Europe as well as emerging and developing countries.
Before the COVID-19 pandemic, advanced countries were said to have “cold economies,” in which interest rates and prices did not rise even in a booming economy, but the situation can be described as having changed dramatically.
The Fed plans to end its quantitative easing program in March. The U.S. central bank has indicated it will raise interest rates three times this year after the end of quantitative easing, and there is a possibility that the Fed will accelerate this process.
Stemming inflation is important. However, when the Fed has tightened monetary policy in the past, funds invested in emerging countries have been pulled out, causing currency crises and other turmoil.
If the Fed raises interest rates too quickly, the U.S. economy itself may deteriorate. The Fed should examine the risks for the global economy and manage its policies flexibly.
When interest rates rise in the United States, the U.S. dollar tends to be bought, as it is advantageous for the management of funds, and the yen weakens. Excessive depreciation of the yen raises the prices of imports, and the adverse effect on Japan is not small. In Japan as well, prices in business transactions for raw materials and other items are rising. Moves related to boosting interest rates must be monitored closely.
The global free trade system is being shaken. The administration of U.S. President Joe Biden has not been able to show leadership in moving the country away from protectionism. China is taking advantage of this situation and trying to take the initiative on trade rules in the Asia-Pacific region.
New zone with U.S.?
China last year formally applied to join the Trans-Pacific Partnership free trade agreement, which now comprises 11 countries including Japan and Australia. This year, China is expected to step up its diplomatic efforts toward the participating countries. Beijing must never be allowed to use the free trade framework to strengthen its hegemony.
Japan should stick to its position that it will be difficult for China to join the TPP as long as it has such issues as unfair subsidies to state-owned enterprises and the infringement of intellectual property rights.
The Regional Comprehensive Economic Partnership (RCEP) agreement among 15 countries, including Japan, China, South Korea and the members of Association of Southeast Asian Nations, has come into effect. China might use the RCEP to step up its efforts to join the TPP.
However, it goes without saying that the conditions for joining the RCEP and the TPP, with its high level of liberalization, are different.
The Biden administration, which focuses more on paying attention to U.S. industries, is reluctant to rejoin the TPP at an early date. Instead of the TPP, the United States has embarked on the creation of a new economic zone in the Indo-Pacific region. This may be aimed at holding China in check, but the details of the envisioned zone are not clear.
It is important for the Japanese government to closely exchange information with the United States and formulate specific measures. Japan must continue to impress upon the United States that the most effective way to prevent China from expanding its influence is for the United States to rejoin the TPP.
Tighter regulations in China
The Chinese economy has been slowing down noticeably since the second half of 2021. The Chinese government’s iron-fist policies have become a risk to the economy.
In preparation for the 2022 congress of the Communist Party of China, the administration of President Xi Jinping has set a goal of “common prosperity” to enrich the entire nation. To achieve this, the Chinese government has tightened restrictions on lending, among other actions, in an effort to calm soaring real estate prices, and leading real estate company China Evergrande Group has been driven into a financial crisis.
China is also tightening regulations on fast-growing domestic tech giants.
China’s economic slowdown will deal a blow to the global economy. The Chinese government must not be obsessed with political slogans, but strive to manage its policies in a realistic manner to ensure stable growth.
— The original Japanese article appeared in The Yomiuri Shimbun on Jan. 9, 2022.
