By: Karan Bhasin
The global resurgence of inflation during the Covid-19 pandemic caught central bankers by surprise. Between the 1990s and 2019, there were significant improvements in the conduct of monetary policy, which helped keep a lid on inflation. This period also saw an expansion of global trade and greater competition — in particular, the integration of the Chinese manufacturing sector with the global economy — which muted inflationary impulses around the world. The pandemic disrupted these trends and shored up supply chain bottlenecks that — coupled with excessive fiscal spending — contributed to global inflationary pressures.
Now, such supply chain bottlenecks are no longer present and any lingering effects have dissipated. It is not surprising that with synchronized monetary tightening and formal inflation targeting regimes, central banks have managed to keep inflation expectations under control. They helped engineer a successful soft landing, reducing inflation without engineering a massive recession.
However, China’s economic trajectory now deserves greater global attention. To be sure, China’s slowdown is not recent. Last decade saw India’s official average annual growth rate surpassing that of China’s. But the recent housing sector crisis compounded by an economy that depends on over-investment for growth indicates further challenges to achieve China’s target growth rates over the remainder of the current decade.
Many emerging markets that supply critical raw materials for global value chains operating through China are extremely vulnerable to an economic slowdown in China. Such vulnerabilities can have implications for the broader growth of emerging markets and the Global South over the course of the coming few years.
Advanced economies that run large trade deficits with China have additional concerns. Weaker domestic demand in China is alleviating inflationary impulses within the domestic economy (it has been below 1% this year), but the effect is being felt in the rest of the world. It will affect the competitiveness of domestic manufacturing bases in several advanced and emerging markets. Weaker demand in China — a country known for its excess manufacturing capacity — will result in Chinese manufacturers increasingly turn to exports markets, including for construction, automobiles (particularly electric vehicles), and other such sectors.
Karan Bhasin is a Non-Resident Fellow at ORF America.