China has slowed down but the odds are against a US recession in 2022 — sustainability is achievable: Jeffrey A. Frankel

What is the core of your research?

I work on monetary a nd f isc a l policy. I’ve researched the effects of international trade on the economic growth of countries and the environment. I’ve also worked on commodity prices and exchange rates and studied crises in emerging markets.

We’re hearing worrying recessionary predictions for the US. What is your view on the near future for America, particularly given employment and inflation?

A. While inflation is globally high, in the US, it is the highest it’s been in about forty years — however, unemployment is almost the lowest it’s been in forty years. The ratio of vacancies to unemployed workers is the highest it’s ever been at almost two vacancies for every unemployed person. Given that it’s been only two years since the extremely sharp pandemic recession, recovery has been swift. I think, despite the inflation, we are better-off today.

So, how realistic are these recessionary worries for the US?

A. There is some ground for worry, like the Federal Reserve raising interest rates and the possibility of shocks from countries like China. But I would say the odds are against a recession in 2022. Interestingly, a majority of Americans polled in a recent survey said they think we are already in recession — but I disagree.

Demand growth is sufficiently strong and inter- est rates have been handled quite aggressively but they are still lower than neutral. Even if interest rates contin- ue to be increased at the rate expected, by the end of 2022, they’ll remain lower than neutral — this means a voice for expansion rather than contraction. The odds for a US recession in the next two or three years are higher than usual — but the realities are not that high. If a recession were to occur, it would likely be the result of the Reserve raising interest rates and tighten- ing monetary policy.

If so, the most impacted foreign countries would include emerging market debtors with very high ratios of debt to GDP or exports, particularly debt denominated in dollars. Increased interest rates are associ- ated with an appreciation of the dollar, so the combination of high interest rates with a strong dollar is very difficult for emerging market debtors. Vulnerable countries include Turkey and Argentina. Also, countries with a high ratio of short-term debt to reserves are in trouble, as we can see with Sri Lanka. Emerging market countries with low levels of reserves and high levels of dollar debt would be in danger if the US went into recession.

What explains the current US crisis in baby formula — and what does this reflect about the sustainability of global supply chains?

The immediate cause is that one of the leading producers — there are only four major baby formula producers in the US — had to recall their product due to the discovery of bacteria in one factory. Such recalls are common but the acute shortage which then occurred is evidence in favour of globalisation, not against it. If we had open international markets, we’d be importing most of the short- fall and the crisis wouldn’t develop. But the US — and we’re not alone in this — has major protectionist barriers against importing dairy products in general. We have explicit tariffs, ‘buy American’ rules for public money spent on this and very strict sanitary standards. Of course, with globalisation, shocks that occur around the world, like the pandemic, can make a domestic economy vulnerable. But many shocks occur within a country too, like the baby formula recall, which reflects how more globalisation and international trade would make our supply chains more resilient.

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Is a Chinese slowdown likely?

This is very likely — China’s economy has already slowed down, mostly due to their Zero-Covid policy and shutdowns. We’ll see more such statistics from China. This makes a big difference to the world. The worst hit will be countries that export to China, particu- larly those who export certain minerals and agriproducts from South America and Africa. A Chinese slowdown contributes to the possi- bility of a world recession, including in the US.

Given the global energy turmoil caused by Russia’s invasion of Ukraine, how central is sustainability to economic planning today?

Sustainable economics is just as important — and just as achievable. I’ve outlined six policies to discourage the import of fossil fuels from Russia, putting a cost on them, while continuing the energy transition and reducing global warming. These include high tariffs on imports of oil from Russia, ending subsidies to the consumption of coal and other fossil fuels, raising taxes on retail refined petroleum products — the US has much lower taxes than European countries — or establishing a carbon tax, creating more careful regulation to cut methane emissions in fracking, continuing to reduce the prices of renewable energy and keeping nuclear power plants open. European countries have been closing these but they pay off economically, provide the West an alternative to Russian oil and succeed in terms of greenhouse gas emissions.

( Views expressed are personal)