3 challenges the world economy must overcomes to avoid danger

Difficult economic challenges await the world in the next stage, as countries will be squeezed between two huge pressure forces, a tighter US monetary policy and a slowdown in growth in China, in addition to the new Coronavirus “Omicron” mutant.

If we look at the picture from a broader perspective, we will notice that there are 3 basic challenges.

If the world succeeds in overcoming them, it will have passed the stage of economic danger, and inflation, high prices and great confusion in the markets are only side effects of these matters.

First: the new mutant

Concerns about the new mutated strain of the coronavirus, “Omicron”, have caused oil prices to plummet, and global stock markets to plunge.

Last Friday, the World Health Organization classified the new mutated strain as “worrying”, the fifth strain to be placed in this classification.

Global oil prices collapsed by more than 10% after the new strain of the Coronavirus raised fears that the renewed imposition of general closures would threaten a global recovery in demand, and reinforce fears of an inflationary global oversupply in the first quarter of next year.

In fact, the problem is not only related to this strain, but the ability of the health system in the world to overcome the current obstacles and future fears regarding the epidemic.

If this issue is not closed completely, it will be difficult to say that the global economy has passed the stage of danger.

Second: The US monetary policy

Strong economic growth in the US in many emerging countries is a double-edged sword, and the expansionary effect of US household spending often outweighs the impact of its monetary policy due to the critical role of the US dollar and Treasury bonds in the global financial system, and tighter US monetary policy is often associated with lower Global risk appetite, capital flows into emerging markets tend to ebb, and a strong dollar reduces trade flows due to its invoicing role.

The 12 months following the bank’s announcement of its plan to begin gradually changing its policies are likely to include a complete moratorium on bond purchases and at least two increases in market-priced interest rates.

Indeed, Federal Reserve Chairman Jerome Powell said a few days ago that it would be appropriate for the US central bank to consider accelerating the termination of its massive program of bond purchases given the strength of the economy and the high rate of inflation.

These routes to US monetary policy are very bumpy for all countries that import in US dollars (especially for energy imports), or that have short-term debt in dollars (the repayment bill will be high).

Third: The Chinese economy… risks that cannot be overlooked

China’s influence in the global economy is more evident.

Beijing ranks – by a large margin – the world’s first consumer of aluminum, coal, cotton, soybeans and other materials, and the main importer of many commodities, so when exporters falter, exporters around the world feel pain.

We say this because growth in the Chinese economy is more at risk of a hard landing now than it was half a decade ago, when the then-Chinese government responded to slow growth by turning on the credit taps which helped re-inflate the housing bubble, and since then the real estate market has become too broad and has risen Household and corporate debt burdens.

Here it is necessary to mention the “frightening” risks that the Chinese real estate company “Evergrand” hides for the market, especially since it is still failing to pay and its story is not over yet.

Economic officials are now issuing regular ominous warnings about what is to come even though the International Monetary Fund still expects China to grow by 5.6% next year, the lowest growth rate Beijing has achieved – except in 2020 – since 1990.