Global stock markets dropped like a stone last week. Often these gyrations don’t represent anything significant. But now they reflect fears of a global economy slipping out of control. Why is this happening? To start, there’s the sharp rise in the rate of inflation. Its background is the economic recovery from the pandemic lockdowns.
The ruling classes on both sides of the Atlantic are afraid that falling unemployment and labour shortages in some sectors will allow workers to protect their living standards by pushing up wages. This would in turn push up prices, unleashing the dreaded wage-price spiral haunting the bosses’ imagination.
This diagnosis has been demolished by the economic historian Adam Tooze. In the US in 2020-1 unit labour costs made a 7.9 percent contribution to price increases, non‑labour costs 38.3 percent and corporate profits 53.9 percent.
This is a profit-led inflation, in which bosses have used the recovery to boost prices and profits. Fossil-fuel producers have done especially well. The Financial Times last week reported that US shale companies are enjoying “a tsunami of cash”—£143 billion, thanks to the high oil and gas prices.
Tooze is sceptical that the inflationary surge will unleash a wage-price spiral. He said,“Trade union density is down across advanced economies. Profit mark-ups have risen over the last thirty years whilst the correlation between wage and price inflation… has declined to zero, or even fallen into negative territory.”
What is dangerous about the inflation is the reaction of the central banks, who now play the main role in managing economies. They are pushing up interest rates. The most important central bank, the US Federal Reserve Board, is quite open in hoping that the increases will drive up unemployment and undermine workers’ attempts to defend real wages.
But there is a serious risk that if the central banks shove up interest rates too fast and too high, they will precipitate a recession. This is what happened when Paul Volcker, then Fed chair, imposed a brutal monetary squeeze to force down inflation in October 1979.
The “Volcker shock” was transmitted globally by a sharp rise in the dollar. This is happening now—the dollar has appreciated by about 16 percent in the past 12 months.
As the economist Mohammed El-Erian points out, in the Global South “dollar appreciation translates into higher import prices, more costly external debt servicing and greater risk of financial instability. It puts further pressure on countries that are already stretched in resources and policy responses by the fight against the ravages of Covid.
“The concern is particularly acute for low-income countries hampered also by high food and energy inflation. A cost of living crisis here is also a threat of famine for the most vulnerable ones. If allowed to burn further, what I have called the ‘little fires everywhere syndrome’… can merge into a bigger, more dangerous combination of damaged global growth, debt defaults, and social, political and geopolitical instability.”
And then there is China, the second biggest economy in the world. President Xi Jinping’s “Zero Covid” policy is cracking thanks to the spread of Omicron and its variants. Widespread anti-vax sentiments among the elderly there mean that 52 million over 60s and 51 percent of over 80s haven’t been fully vaccinated. When Omicron hit Hong Kong, there were over 9,000 deaths, mainly in the over 60s. Hence the brutal and unpopular lockdown in the economic hub of Shanghai and the more limited lockdown in Beijing.
The negative impact on an economy already struggling with the bursting of a gigantic real estate bubble is becoming visible. In April retail sales fell by 11.1 percent and youth unemployment rose to a record 18.2 percent. And when the Chinese powerhouse slows, the rest of the world feels it.
Add in the impact of the Ukraine war in increasing energy and food prices and the prospect is pretty grim. Let’s hope that Tooze is wrong and workers are able to flex their muscles.
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