Turning points are always difficult to embrace — if this indeed is one. So let’s accept this half-full glass.
After a dour few months marked by a proliferation of recession calls, global economic prospects are improving. From China’s unexpectedly quick reopening to optimism that interest rates are close to peaking, there’s been a run of good news. Forecasters at the International Monetary Fund, who spent the past year downgrading their numbers, raised their outlook for world growth a smidge.
The lender even went so far as to float the notion of a crossroads, something that economists are usually reluctant to be definitive about. While laying out slightly better projections for 2023, Chief Economist Pierre-Olivier Gourinchas strained not to be too enthusiastic. “The outlook has not worsened this time around, which itself is good news,” he said in Singapore this week. “But it's still not enough.”
Whisper it if you must, but we might be past the worst. Things can still go wrong: Inflation’s retreat from the highest point in decades may stall, the famous lags in monetary policy’s imprint on the economy could reveal themselves to be more severe than thought. China’s comeback could fizzle or Russia’s aggression in Ukraine could take an even more dangerous turn. These aren’t baseline scenarios, however.
One immediate benefit to the world economy is China’s return to relative normality after Covid Zero almost suffocated the expansion. Surveys of purchasing managers suggest that manufacturing and services are staging a big comeback. Lunar New Year travel and box office showed signs of recovery as people took advantage of a holiday free of strict restraints. Outbound air-ticket bookings more than quadrupled year-on-year and reservations doubled at overseas hotels, the National Business Daily reported. Hong Kong, Macau, Bangkok and Singapore were listed as the top destinations. In the city state, I was struck by brisk activity at Adventure Cove Waterpark and nearby Universal Studios. Relative to the past few years, the resort island of Sentosa appeared to be humming.
China’s bounce may not be an unqualified good. The burst of growth could bring with it faster inflation, as was the case in the US, Europe and other parts of Asia. The pace of price increases in the country at the end of last year was fairly subdued, though that could change, complicating an otherwise heartening global picture. Federal Reserve Chair Jerome Powell made some encouraging noises Wednesday after the Fed scaled back the size of its rate hikes to a mere quarter point: “It is gratifying to see the disinflationary process now getting under way.”
Notwithstanding the transition in Fed policy since four 75-basis-point moves last year, Powell reminded his audience that there are more rate increases to come. He protests too much; the conclusion of a tightening cycle for the ages is in sight. Markets, which allied, are right to set aside Powell’s hesitancy. A new monetary phase has already begun in Asia. South Korea, a very early mover, is likely done. Malaysia recently passed on a widely expected hike, and the Reserve Bank of Australia has countenanced a breather. None will declare their job done. There’s too much egg on faces from errors in 2021. That won’t subtract from the broad takeaway that monetary policy won’t dominate the news cycle — for the worse — this year.
A day after releasing the new forecasts, Gourinchas gave a lecture at the National University of Singapore’s Lee Kuan Yew School of Public Policy. I went along and asked why turning points were so tricky to call, and whether there’s something about this one that was particularly fraught. He responded in nautical terms: When the wind is blowing at a steady speed, it’s easy to predict where it will be blowing from in the next hour or so. When the wind is calming down or dying, it becomes hard to predict where the wind will blow from when it starts again. That’s the turning point analogy. We have a number of drivers of the global economy that had been very important in 2022 and they were all pushing in the same direction… (now) we are getting nearer to a point where the forces could realign in a different way, just like the wind dying and starting to blow from a different direction. That’s what makes it difficult as a forecaster to figure out whether it’s going to be more of the same or things are going to come in differently.
Sure, things could still deteriorate. But look how far we have come. Few people predicted China would flip from “no” to “go” with such alacrity and force. It’s also become increasingly clear that the debate late last year about what constituted a central bank pivot was a distraction from the substantive message that tightening was getting closer to the end than the beginning.
The negatives haven’t gone away, but they have receded. That’s worth an ice cream after your hot dog at Adventure Cove.
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