Global Economy: Discerning Turn of Inflation’s Tide Will Be Important / Keep Eye on China’s Real Estate Slump

Inflation is subsiding around the world. Major countries and regions that have been raising interest rates rapidly will enter a phase in which they will seek to shift to cutting rates. This year, the policy management of governments and central banks will be tested.

As the novel COVID-19 spread in 2020, global economic activities came to an abrupt halt. Subsequently, a sharp recovery in demand and disruptions in logistics, among other factors, led to shortages in the supply of semiconductors, food and other goods, causing inflation.

Soaring energy and grain prices caused by Russia’s aggression against Ukraine has made the situation even worse.

Growth expected to slow

Inflation impoverishes people’s lives, especially low income earners. Central banks in various countries and regions rushed to raise interest rates to keep prices from rising. The fact that inflation around the world is now being brought under control may show that such measures were effective.

In the United States, the year-on-year rate of increase in the consumer price index (CPI) slowed to 3.1% in November 2023, down from a peak of 9.1%. In Europe, too, the rate of price increases has declined.

On the other hand, monetary tightening measures tend to cool an economy. In exchange for the suppression of inflation, the economy is likely to slow down.

According to a forecast made by the Organization for Economic Cooperation and Development, the real economic growth rate for the world as a whole in 2024 will be 2.7%, down from 2.9% in the previous year.

Looking at countries and regions, the figure for the United States is expected to fall to 1.5% from 2.4% in the previous year. In Europe, the real economic growth rate in the eurozone was already negative in the July-September 2023 period due to the impact of interest rate increases.

In 2024, central banks in Western nations are highly likely to cut interest rates.

Fed to decide timing, pace of rate cuts

The U.S. Federal Reserve Board raised its benchmark interest rates to a range of 5.25% to 5.50%, but has made no further interest rate increases since its meeting in September last year.

The Fed’s forecast for the key interest rate at the end of 2024, which it made in December last year, was 4.6%. If it follows this forecast, the central bank will cut rates within this year. The focus is on the timing and pace of the rate cuts.

If the Fed shifts to interest rate cuts, it will likely halt the depreciation of currencies in other countries, including Japan. If the burden of interest on corporate borrowing and personal loans decreases in the United States,it would result in a less severe economic slowdown there, which would also benefit many other countries.

However, there remains a risk that inflation could flare up if interest rates are cut too hastily. The rate of price increases is still high compared to the Fed’s 2% target. Yet even amid the rate increases, the U.S. economy was unexpectedly strong in 2023. In the U.S. stock market, the Dow Jones Industrial Average is at its highest level.

To prevent the economy from overheating and forcing monetary policy to be tightened again, it is hoped that the Fed will make efforts to carefully analyze economic and price trends.

The Chinese economy will be a risk factor in 2024. The main reason is that the real estate sector, including related industries — which together are estimated to account for a quarter of China’s gross domestic product — has been stagnant due to falling housing prices caused mainly by restrictions on real estate loans.

Major real estate companies have fallen into financial crisis one after another. However, the administration of Chinese President Xi Jinping finds it difficult to move to bail out real estate firms, partly because it was the government itself that restricted real estate loans to prevent widening inequality.

In China, rising real estate prices have been the driving force of economic growth. If this were to reverse, the damage to the economy would be significant.

China’s CPI fell 0.5% from a year earlier in November last year. As fears of deflation are growing, some have pointed out that the situation resembles that of Japan, when it experienced a prolonged slump after the bursting of its bubble economy.

If the Chinese economy stalls, the impact on the global economy will be enormous. There is a need to pay close attention to this trend.

In addition to the intensifying confrontation between Washington and Beijing, the situations in Ukraine and the Middle East will make the strengthening of economic security a major theme. For advanced nations, such as Japan, the United States and Europe, the challenge is to break away from excessive dependence on China in terms of trade.

As the world aims to decarbonize, the spread of solar power, offshore wind power and electric vehicles is essential, but supplies of many of the necessary raw materials and components, including key minerals, are dependent on China.

Strengthening economic security

China is using such materials as a means of economic coercion to put pressure on partner countries by restricting trade. Japan must work closely with the United States, Europe and other countries to diversify its supply chains.

On the other hand, too much focus on economic security could lead to an expansion of protectionism. In the United States, there is a possibility that former President Donald Trump will return to power as a result of the November presidential election, in which case Washington could again lean toward protectionism.

Excessive protectionism is harmful to the global economy. Although geopolitical risks may increase, the importance of free trade will not change. Japan should make this point to the international community.

(From The Yomiuri Shimbun, Jan. 11, 2024)