What We're Reading:

Freight rates crisis ‘could be exacerbated’ by fresh Covid outbreak. High freight rates and shipping congestion issues are now expected to continue into mid-2022, experts are warning, particularly if the Omicron coronavirus variant prompts fresh containment measures in the US or China. (Global Trade Review)

Turkey’s currency is crashing. What’s the impact? Here is a closer look at the Turkish currency crisis and its impact on a country with eye-popping inflation. (AP News)

SEC moves a step closer to delisting Chinese companies in the US. The U.S. government is inching further on efforts to boot Chinese companies off American stock exchanges for not complying with Washington’s disclosure requirements. (Bloomberg)

Navigating cybersecurity risks in international trade. For companies that sell digital products internationally, cybersecurity concerns can have a devastating impact on business — companies can be barred from national markets, get tangled up in politics, and have their reputations maligned across the globe. (Harvard Business Review)

U.S. Treasury says Vietnam, Taiwan exceed currency thresholds, but no manipulator labels. The Treasury said no major U.S. trading partners sought to manipulate their currencies for a trade advantage or for preventing effective balance of payments adjustments during the year through June 2021. (US News & World Report)

Where's the paper, ink, lightbulbs? US offices struggle with supply shortages. While news of the Omicron coronavirus variant threatens to derail U.S. companies' return-to-office-plans, employers trying to get workers back into offices said they are encountering a different, unforeseen challenge: keeping the lights on. (Reuters)

IMF urges the Fed to speed up monetary policy tightening amid mounting inflation fears. Fed Chairman Jerome Powell said the central bank could step up its tapering efforts and that this would likely be discussed at a meeting this month. (CNBC)

US, EU set to discuss joint approach to assertive China. UNITED STATES and European Union officials discussed a joint approach to an increasingly assertive China during a high-level dialog on Thursday, saying that finding common ground on key issues makes it harder for Beijing to ignore those topics. (Business Mirror)

US retailers face growing pressure over maritime carbon emissions. Climate campaigners are calling on major US retailers to switch to zero-emissions shipping practices as a matter of urgency, after estimating that four companies accounted for 20 million tonnes of carbon emissions in just two years. (Global Trade Review)

China is getting worried about Africa’s indebtedness to it. As Africa’s largest creditor, defaults and risk of defaults from African countries are a major risk to China. (Quartz)

EU seeks to forge new global trade rules with US. The European Union has experienced a “breakthrough year” with the United States even if not all trade irritants are gone and now wants to work with its transatlantic ally to start forging trade rules for the future, the EU trade chief said. (HSN)

Mexico may impose tariffs over proposed US electric car tax credit. A proposed U.S. electric vehicle tax credit is "discriminatory" and Mexico is analyzing a range of legal actions in response that may include tariffs, Mexican Economy Minister Tatiana Clouthier said on Thursday. (US News & World Report)

Global tax deal leaves billion-dollar loopholes. Leaders of the world’s largest economies hailed a recent agreement to overhaul global corporate tax rules. But some companies could still use Ireland to reduce their tax bills even after the agreement takes effect, according to tax specialists and a Reuters review of corporate filings. (Reuters)

China, US tussle over Biden’s ‘Summit for Democracy.’ China and the United States are tussling over President Joe Biden’s upcoming democracy summit, which the ruling Communist Party sees as a challenge to its authoritarian ways. (AP News)

China shipping data loss could be a ‘breeding ground’ for fraud. Banks may struggle to detect fraud and comply with sanctions regulations, risking heavy fines and losses, due to a sudden inability to track thousands of vessels in Chinese waters over the last month. (Global Trade Review)

Key global events to watch in December. A list of key upcoming meetings and events that have implications for global affairs. (Global Observatory)

In Eastern Europe, despite the challenges faced during the second year of the pandemic, payment practices hold steady, according to trade credit insurer, Atradius.

The Atradius Payment Practices Barometer Survey results for Eastern Europe paint a promising picture of businesses that have maintained the status-quo, despite the challenges faced during the second year of the pandemic. Key metrics, including the percentage of write-offs and total volume of overdue B2B invoices, show little year-on-year change. Write-offs averaged 5% of B2B invoices' total value this year, the same as last year. This contrasts with the survey results for Western Europe, where write-offs increased from 7% to 10% of B2B invoices' total value.

Overall, business confidence in Eastern Europe is strong. 73% of the region anticipates growth next year, with stand-out results seen in Slovakia and the Czech Republic where businesses predict growth of 87% and 84% respectively. However, this buoyant mood is tempered by downside risks. Insolvency risk is likely to rise in 2022. While this risk is highest in Italy and U.K., bad debt risks are also higher for businesses that trade with these markets.

"Businesses throughout Eastern Europe, especially those involved in export and international trade would be well advised to take steps to protect their accounts receivable from the risk of nonpayment now, before we enter the more challenging insolvency conditions anticipated in 2022," said Thomas Langen, Atradius senior regional director of Germany, Central and Eastern Europe.

The withdrawal of Covid-19 government fiscal support is the main driver of the increased credit risks. Uncertainty over the evolution of the pandemic and, in particular the threat of future waves caused by new variants, also poses a downside risk.

The pandemic has resulted in many businesses adopting digitalization (57% of the region reported this) and adapting to changes in customer demand and supply chains (39% of respondent alike). More than half (51%) said they had enabled remote working.

The Atradius Payment Practices Barometer survey for Eastern Europe was conducted in the Q3 2021 in seven countries across the region (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Turkey). The results provide a good insight into payment behavior of specific industries and markets and can provide a good temperature check of market confidence. 

The global recovery is continuing, but its momentum has eased and is becoming increasingly imbalanced, according to the OECD’s latest Economic Outlook. The failure to ensure rapid and effective vaccination everywhere is proving costly with uncertainty remaining high due to the continued emergence of new variants of the virus.

Output in most OECD countries has now surpassed where it was in late-2019 and is gradually returning to the path expected before the pandemic. However, lower-income economies, particularly ones where vaccination rates against COVID-19 are still low, are at risk of being left behind.

The outlook projects a rebound in global economic growth to 5.6% this year and 4.5% in 2022, before settling back to 3.2% in 2023, close to the rates seen prior to the pandemic. 

The strong pick-up in activity seen earlier this year is losing momentum in many advanced economies. A surge in demand for goods since economies reopened, and the failure of supply to keep pace, have generated bottlenecks in production chains. Labor shortages, pandemic-related closures, rising energy and commodity prices, and a scarcity of some key materials are all holding back growth and adding to cost pressures. Inflation has increased significantly in some regions, early in this recovery phase. 

Alongside cost pressures from manufacturing supply bottlenecks and food price increases, imbalances in the energy market are a key factor driving up inflation in all economies. Gas prices have risen sharply, notably in Europe, and risks are high, with storage levels around 28% lower than they would normally be at this time of the year. Rising food and energy costs are inevitably hitting low-income households the hardest.  

Inflationary pressures are proving stronger and more persistent than expected a few months ago. Consumer price inflation in the OECD is now projected to start fading in 2022, before moderating as key bottlenecks ease, capacity expands, more people return to the labor force and demand rebalances. The outlook underlines the risk that continued supply disruptions, perhaps associated with further waves of COVID-19 infections, may result in longer and higher inflationary pressure.

Another risk, exposed by the emergence of the Omicron variant in recent days, is a worsening health situation due to COVID-19 resulting in further restrictions that would jeopardize the recovery. The outlook says ensuring better access to vaccines for all must be an urgent policy priority. A faster, better coordinated, worldwide vaccine roll-out is not only essential for saving lives and preventing the emergence of new variants, but would also help tackle some of the bottlenecks undermining the strength of the recovery by allowing factories, ports and borders to re-open fully.

A potential sharp slowdown in China, if activity in the property market declined abruptly amid concerns about the financial soundness of some of the largest real estate developers, could also disrupt the global recovery. The impact of such a slowdown would spread rapidly to other countries, particularly if it generated uncertainty in global financial markets and added to the current bottlenecks in supply.

“The strong rebound we have seen is now easing and supply bottlenecks, rising inflation, and the continuing impact of the pandemic are clouding the horizon,” OECD Secretary-General Mathias Cormann said. “The risks and uncertainties are large—as is being seen with the emergence of the Omicron variant—aggravating the imbalances and threatening the recovery. Keeping the recovery strong and on track will entail addressing a number of imbalances, but above all it will mean managing the health crisis through better international coordination, improving health systems and massively stepping up vaccination programs worldwide.”

The economic outlook says the removal of pandemic-related government support will need to be gradual to avoid weakening activity. But changes in the composition of spending are required, to provide space for higher levels of public investment and accommodate the deep economic transformation of addressing climate change. Clear guidance by fiscal and monetary authorities on their policy strategies will be crucial to maintain market confidence and public support.

The resurgence of the pandemic and the latest variant, Omicron, have sharply increased uncertainty around global economic prospects. This comes as several countries grapple with inflation well above their monetary policy targets. It is however evident that the strength of the economic recovery and magnitude of underlying inflationary pressures vary significantly across countries. Accordingly, policy responses to rising prices must be calibrated to the unique circumstances of individual economies.

We see grounds for monetary policy in the United States—with gross domestic product close to pre-pandemic trends, tight labor markets and now broad-based inflationary pressures—to place greater weight on inflation risks as compared to some other advanced economies including the euro area. It would be appropriate for the Federal Reserve to accelerate the taper of asset purchases and bring forward the path for policy rate increases.

Over time, if inflationary pressures were to become broad-based in other countries, more may need to tighten earlier than currently expected. In this environment it is essential for major central banks to carefully communicate their policy actions so as not to trigger a market panic that would have deleterious effects not just at home but also abroad, especially on highly leveraged emerging and developing economies. Needless to say, given the extremely high uncertainty, including from Omicron, policymakers should remain agile, data-dependent, and ready to adjust course as needed.

The Global Inflation Landscape

Rising energy and food prices have fueled higher inflation in many countries. These global factors may continue to add to inflation in 2022, especially high commodity food prices. This has particularly negative consequences for households in low-income countries where about 40% of consumption spending is on food.

A measure of inflation which strips out volatile fuel and food inflation, so-called core consumer price inflation has also risen but exhibits significant variation across countries. Some of the increase in core inflation in countries reflects reversals of price falls in 2020, such as from the unwinding of VAT tax cuts in Germany. It therefore helps to focus on annualized cumulative inflation since pre-pandemic. By this measure, core inflation among advanced economies has risen most sharply in the United States, followed by the United Kingdom and Canada. In the euro area the increase is much less so. There are also limited signs of core inflationary pressures in Asia, including in China, Japan and Indonesia. Among emerging markets, core is dramatically elevated in Turkey.

Median inflation, a measure that is not affected by exceptionally large or small price changes in a few categories of goods and therefore conveys the breadth and likely persistence of price pressures, similarly varies across countries. The recent rise in median inflation for the United States to around 3% in October is also higher than for other Group of Seven countries.

While inflation is likely to remain elevated well into 2022 in several countries, measures of inflation expectations for the medium and long-term remain close to policy targets in most economies. This reflects, in addition to expectations of waning inflationary forces, that policy actions can bring inflation back to target.

In the United States, long-term inflation expectations have increased but remain close to historic averages and thus appear well-anchored. Euro area expectations have increased but from levels well below target to now close to it, which suggests long-term expectations may have become better anchored to the European Central Bank’s 2% objective. For Japan, inflation expectations remain well below the target.

For several emerging markets, including India, Indonesia, Russia and South Africa, expectations show signs of being anchored. Exceptions include Turkey, where the risk of inflation expectations becoming unmoored is apparent as monetary policy is eased despite rising inflation.

Sources of Price Pressures

The rise in core inflation reflects multiple factors. Demand has rebounded strongly supported by exceptional fiscal and monetary measures, especially in advanced economies. In addition, supply disruptions caused by the pandemic and climate change, and a shift in spending toward goods over services have increased price pressures. Furthermore, wage pressures are apparent in some segments of labor markets. The United States has experienced a more prolonged reduction in labor-force participation relative to other advanced economies, further adding to wage and inflationary pressures.

We expect the mismatch in supply and demand to attenuate over time reducing some price pressures in countries. Under the baseline, shipping delays, delivery lags, and semiconductor shortages will likely improve in the second half of 2022. Aggregate demand should soften as fiscal measures come off in 2022.

That said, it’s important to keep in mind that economic activity has rebounded quickly in several countries, with the United States experiencing the fastest recovery among large, advanced economies. It is in such countries, where economic activity has rebounded more quickly to pre-pandemic trends, that core inflation has risen sharply relative to levels before the crisis. This relationship between recovery strength and core inflation, while far from perfect, suggests stronger underlying inflationary pressures in countries where demand has recovered the fastest.

Varied Policy Action

At the onset of the pandemic, policymakers around the world were synchronized in dramatically easing monetary policy and expanding fiscal policy. These actions helped prevent a global financial crisis, despite lockdowns and health shocks causing a historic recession. The confluence of very low inflation and weak demand provided a strong rationale for easy monetary policies.

Earlier this year, when inflation picked up sharply, it was driven by exceptionally high inflation in a few sectors such as energy and autos, much of which was expected to reverse by the end of the year as pandemic related disruptions declined. Central banks, with a long track record of keeping inflation low and stable could appropriately “look through” the runup in inflation and keep interest rates low to support the economic recovery.

However, risks of a further acceleration of inflation previously flagged in our global publications and country-specific reports are materializing, with supply disruptions and elevated demand lasting longer than expected. Inflation is likely to be higher for longer than previously thought, which means that real rates are even lower than before, implying an increasingly expansionary stance of monetary policy.

While we still anticipate that supply-demand imbalances will wane next year, a singular focus of monetary policy on supporting recovery may well fuel substantial and persistent inflationary pressures, with some risk of de-anchoring inflation expectations. Accordingly, in countries where economic recoveries are further along and inflationary pressures more acute it would be appropriate to accelerate the normalization of monetary policy.

Potentially Challenging Spillovers

The challenge of addressing large and persistent supply shocks is even greater for emerging market central banks. Given the greater risk to de-anchoring of inflation expectations relative to advanced economies, they see the need to get ahead of inflationary pressures and some—such as Brazil and Russia—have raised policy rates sharply. Such tightening comes amid large COVID-related output shortfalls and could further depress output and employment. Emerging markets face potentially challenging spillovers if tightening by advanced economies causes capital outflows and exchange rate pressures that could require them to tighten even more.

Lastly, there remains tremendous uncertainty around the evolution of the pandemic and on its economic consequences. A variant that significantly reduces vaccine efficacy could lead to further supply chain disruptions and contractions in labor supply pushing up inflationary pressures, while lower demand could have opposing effects. The sharp fall in oil prices following the discovery of Omicron and the rapid imposition of travel restrictions by countries is a sign of the volatility ahead.

In sum, policymakers must carefully calibrate their response to incoming data. Varying inflation conditions and strength of recoveries across countries show why the policy response needs to be tailored to country specific circumstances, given sharply higher uncertainty associated with Omicron. Clear central bank communication, too, is key to fostering a durable global recovery.

As we warned in recent reports such as the World Economic Outlook, a more frontloaded Fed response to dampen inflation risks could result in market volatility and create difficulties elsewhere—especially in emerging and developing economies. To avoid that, policy shifts need to be telegraphed well, as has so far been the case. Emerging market and developing economies should also prepare for increases in advanced economy interest rates through debt maturity extensions where feasible, thereby reducing their rollover needs, and regulators should also focus on limiting the buildup of currency mismatches on balance sheets.

Reprinted with permission by IMF Blog. 

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations