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Coping with inflation worldwide remains the biggest challenge for the global economy this year. Governments and central banks in each nation and region are urged to steer appropriate policies to prevent a serious deterioration of the economy.
The Organization for Economic Cooperation and Development projects that growth in the world’s gross domestic product in 2023 will slow to 2.2% from 3.1% in the previous year. By country and region, the OECD forecasts the United States and the eurozone will slump to 0.5% GDP growth, and the United Kingdom will fall into negative growth.
Tightening exacerbates slowdown
A big reason for the slowdown is the monetary tightening that central banks of various nations and regions have been implementing in order to curb rising prices.
Inflation is hurting people’s livelihoods, especially hitting hard those with low incomes. It is inevitable that the economy will slow down to some extent in exchange for curbing inflation. A situation where excessive monetary tightening leads to a steep economic slowdown must be avoided, however.
Inflation became conspicuous after the spread of the novel coronavirus. This was due to supply constraints caused by labor shortages and logistic disruptions resulting from the COVID-19 pandemic, and the fact that many countries implemented large-scale fiscal stimulus policies.
Furthermore, the crisis in Ukraine has spurred a sharp rise in the prices of oil, natural gas and other resources, as well as food.
The Federal Reserve Board and other major central banks initially judged that inflation was temporary and they were slow to respond. These delays have been widely viewed as leading to rapid rate hikes.
It is important to analyze price fluctuations more carefully and raise interest rates at an appropriate pace in order to achieve a soft landing for the economy.
Fed bears heavy responsibility
After lifting the interest rate from near zero in March last year, the Fed continued to raise interest rates sharply, bringing the policy rate to 4.25%-4.5%, the highest level since 2007, or 15 years prior.
In the United States, rising mortgage rates have led to a decline in housing investment and there are signs of deterioration in consumer spending. If the U.S. economy stalls, the impact on Japan, which exports automobiles and machinery, and the global economy would be enormous.
In addition, an increase in U.S. interest rates could possibly have a major impact on emerging and developing countries. The dollar is appreciating and other currencies are depreciating, so emerging and developing countries are suffering from higher import prices. The outflow of funds to nations such as the United States may accelerate.
There is also the fear that emerging economies’ dollar-denominated debts, which are at record-high levels, will swell due to the dollar’s appreciation, making it difficult for them to repay their debts.
The Group of 20 finance ministers and central bank governors last October expressed their view that care must be taken so that monetary tightening will not adversely affect other countries. This apparently was said with the Fed in mind.
The Fed is urged to strive to manage monetary policy prudently while listening to the concerns of other countries.
This year also will be a year of searching for a new international order for the economy.
The post-World War II global economy has evolved through free trade based on World Trade Organization agreements. The free trade system is now at a turning point, however, due to the U.S.-China conflict and the Ukraine crisis.
In particular, the ability to stably procure critical commodities such as semiconductors, liquefied natural gas, mineral resources and pharmaceuticals is a key determinant of a country’s economy. It is necessary to either produce them domestically or secure them from nations that share the same political system and values.
It is Japan’s urgent task to strengthen its supply chain by cooperating with the United States and European nations that share the same values of freedom and democracy. Efforts by the private sector to diversify its procurement sources will be essential.
Respond to divisions realistically
The heart of the democratic camp is U.S. President Joe Biden’s administration, which regards the authoritarian regime of China as its only competitor and is therefore tightening export controls in the semiconductor and other high-tech sectors. It is believed that the United States will seek Japan to follow suit.
However, it is not a good idea to overly promote the division of supply chains. China is Japan’s largest trading partner. Japan must closely coordinate with the United States over fields that are critically important from a national security standpoint and seek realistic measures to deal with the issue.
As the world’s second-largest economy, China’s economic fluctuations must be closely watched.
In order to achieve economic recovery, Chinese President Xi Jinping’s third-term administration has ended its zero-COVID policy of containing infections through strict travel and other restrictions.
The abrupt change in policy, however, has led to a surge in infections, with factory production, retail sales and other economic activities reported to be falling off more than before.
The turmoil in China is a major risk also to the global economy. The Chinese government is said to be stuck on the idea of inoculating its people with domestically produced COVID-19 vaccines, but China needs to consider accepting vaccines developed in the West to bring the situation under control as quickly as possible.
