Interest rate alarm from the Far East
The next wave of inflation is rolling out of China
By Diana Dittmer
2/3/2023 2:09 p.m
China is restarting the economy after the lockdown. But the country’s sudden awakening from the Corona sleep could come as a shock to the global economy – and thwart the central bankers’ fight against the price spiral just as it is beginning to take effect.
Prices have soared worldwide, leaving consumers groaning. Buyers are primarily interested in when the price spiral will end. But there is no real reason for the all-clear. The crowd of economists is roughly assuming that higher prices will continue. And that wouldn’t be the worst scenario.
According to the IFO Institute, the burden on German consumers increased significantly again in January. After all, fewer companies in Germany are now planning to raise their prices even further. The barometer for price expectations for the next three months fell to its lowest level in more than a year and a half in January. “We have left the apex of the inflationary wave behind us,” commented IFO economics chief Timo Wollmershäuser on the numbers.
What sounds like music to the ears of buyers who are battered – especially by energy prices – is by no means a foregone conclusion. The IFO Institute also warns that prices are only likely to return slowly from their current levels. In addition, inflation will not ease equally in every area. But the real problem lurks somewhere else: crises – whether virus pandemics, recession or inflation – are not isolated in a global world. Economists are therefore looking back to China and the end of the corona measures there with great concern.
First the virus, then the recession, then inflation
“There will be higher inflationary pressure from there,” said ECB boss Christine Lagarde recently at the world economic summit in Davos. One reason she cited was China’s increased demand for liquefied gas.
Kristalina Georgieva, head of the International Monetary Fund, made a similar statement in Davos. China’s departure from the zero-Covid strategy is likely to be the single most important factor behind global growth in 2023, but at the same time she warned of the impact on inflation. “What if the good news that China is growing faster causes oil and gas prices to skyrocket and put inflation under pressure?” Bank of Korea Governor Rhee Chan-Yong and US Federal Reserve Vice Chair Lael Brainard also expressed concerns in January about the impact on inflation.
The fact is: China’s economy and consumers are shuffling their feet. According to calculations by the finance agency Bloomberg, there were almost 96 million trips by plane, train and car in the first four holidays of the Lunar New Year. Revenue from domestic tourism alone totaled 375.84 billion yuan (about $56 billion), think tank CGTN calculated. That’s an increase of 30 percent compared to the previous year. The Chinese want to travel again and finally make purchases that have been postponed for years. Hong Kong is also promoting the urge to move with 500,000 flight tickets being given away as part of the “Hello Hong Kong” campaign. It is designed to attract much-needed visitors. Hong Kong hopes that each person who receives a ticket will bring two to three other friends or family members to Hong Kong. That should stimulate the economy.
If China’s calculations work out, the pent-up demand of the people that have been simmering in lockdown for a long time are giving the economy a boost whose consequences for the global economy are difficult to predict. The difference between lockdown and opening up in China equates to an estimated additional demand of around US$500 billion, according to Bloomberg. The mood in China’s economy has brightened for the first time in months. The purchasing managers’ index PMI rose significantly in January compared to the previous month. Bloomberg economists expect China’s economy to grow by 5.8 percent this year. For the rest of the world, where interest rates and inflation are moving in the right direction again, this could be a nudge in the wrong direction at the wrong time.
Energy and raw material prices are rising
How the growth fantasies in China are causing prices to skyrocket can already be seen on the raw materials market. The economic engine of the world, which is again under steam, is starving for raw materials. Copper prices have already risen to $9,000 a ton and oil prices have climbed to over $80 from a low of $70 a barrel WTI in December. Commodity experts also believe that prices of over 100 dollars are possible.
Beijing’s departure from the zero-Covid strategy and the awakening of the economy from the Corona slumber are both a blessing and a curse. For the ECB, Fed and Bank of England, all of which hiked interest rates this week, the fight against inflation could become one against windmills. Fed Chair Jerome Powell said Fed Chair Jerome Powell said policymakers are expecting them to make “a few” more rate hikes, even if they slow down their efforts to contain inflation. And ECB President Christine Lagarde emphasized that there was a “very, very large majority” in the Council for the rate hike decision and the “declaration of intent” to follow up in March. The danger is that it is not yet the end of the road.
According to Bloomberg experts, who have looked closely at the interactions between China’s growth, energy prices and global inflation, the inflation rate is likely to rise by up to two percentage points in the last quarter of 2023 with above-average growth in China of 6.7 percent. With economic growth of 5 percent, it would still be one percentage point more. In view of the high inflation rates in the major industrial nations, the USA (9.1 percent), the euro zone (8.5 percent) and Great Britain (10.5 percent), this could be fatal.
Even if uncertainties remain: an economic engine in China that not only boosts global growth but also global inflation would be highly unwelcome. Fighting inflation is not a one-way street. The inflation rate can fall, but it can also rise again. And it can at least not be ruled out that the peak of inflation is not behind us, but ahead of us – there are some potential dangers lurking in China. The most obvious is a possible raid on Taiwan.