American inflation, Europe’s energy crisis and China’s Omicron outbreak threaten the world economy with a downturn
JUST A YEAR ago the world’s economists were celebrating a rapid rebound from recession. Now they are worrying that the next downturn could be looming. In America the Federal Reserve is preparing to do battle with high inflation by raising interest rates sharply and shrinking its balance-sheet. In Europe expensive energy is sapping consumers of spending power and making factories costlier to run.
The economy in the United States is overheating. The annual rate of consumer-price inflation is 7.9% and hourly wages are 5.6% higher than they were a year ago. America has nearly twice as many job openings as it does unemployed workers—the highest ratio in 70 years. For much of 2021 central bankers hoped that Americans who left the labour force after the pandemic struck would return, helping cool the labour market.
Europe has an inflation problem too, but it is so far caused by expensive imported energy and food more than by overheating. Russia’s invasion of Ukraine and Western sanctions threaten the continent’s energy supply. Gas prices for next winter are five times higher than in America, and spending on household energy is almost twice as high as a share of GDP . As energy prices have surged, consumer confidence has slumped. Firms are struggling too: French industrial production fell in February.
The threat to global growth from China’s Omicron outbreak is the most severe and immediate. China reported over 20,000 new cases of the virus on April 6th. Because the government is committed to eliminating covid-19, Shanghai’s 26m residents, and those of several other big cities with outbreaks, are under strict lockdown. If the past relationship between lockdowns and GDP holds, China’s real-time output will be 7.1% lower than in a world with no restrictions, according to Goldman Sachs.
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