External developments that complicate economic recovery

In my column of Sept. 1, I discussed some headwinds against the economic recovery. The environment surrounding the economic recovery can be affected by what is happening around us, sometimes beyond our immediate control.

We may, therefore, be more wary of some recent developments: (1) The tightening energy picture that pushes inflationary tendencies. (2) Recent events in the Chinese economy which are significant to our region in Asia. (3) US fiscal politics that imparts nervousness in the world’s financial markets. And, (4) geopolitical developments that reminds us that our region is in some turmoil.

Tightening energy picture: inflationary pressure.

The approach of winter in the cold countries always signals rising demand for energy. Recent conditions have been preceded by very low energy demand in view of the world COVID pandemic recession.

However, other developments have converged to produce tight energy supplies that cause rising prices. In January, crude energy prices were at around $51 per barrel, but by October, they are now at around $80 per barrel.

These developments favor the oil-producing countries. The oil producers – led by the OPEC cartel – are likely to want slow expansion of energy supply to keep price at elevated levels. As in the past, markets adjust to bring the price from rising too much. There are competing producers of energy that are not bound by the OPEC cartel.

For the moment, rising energy prices might dominate the market. Thus, energy importing countries, like the Philippines, will feel this squeeze since domestic energy prices are indexed to world prices.

In fact, Philippine inflation has risen, in part, due to energy prices, but also due to logistical issues related to the pandemic. Recent September price inflation – at five percent year-on-year – is providing discomfort to policy-makers in the midst of trying to encourage economic recovery in a recession.

Internal developments in the Chinese economy. Big changes are happening in China. Such changes could be happening in part as China’s major economic advances have also heightened economic competition with, and challenges from, the United States.

For many decades, the internal dynamics of the Chinese economy had been fueled by the Deng Xiaoping reforms, which embraced many capitalistic practices. Now that China has reached super-economic power status, the forces of reversal toward more state control of social policies and inward-looking shift seems to be happening. The intense competition that continues with the change in political administration in the US has become more manifested in facets of industrial and technological development.

These over-arching developments besides, China is also uniquely facing internal disruptions that could be symptoms or manifestations of the success of its economic rise.

The first of this is electric power shortages recently felt in the major industrial cities. Electricity use of modernizing cities compete with the continued and ever-rising demand for electric power of its industrial establishments.

The second is the rapid expansion of the property and commercial sectors that has encouraged unchecked buildup of liability. The Evergrande property developer is an example. It has been behind in interest payments amounting to more than a quarter of a billion dollars. Trading of its stock last Monday was suspended to avoid a rough day at the exchange.

Could this be a warning sign of the broader internal financial market turbulence? This event could spill over to the region’s financial markets and generate more uncertainty and volatility.

China is highly linked to many countries, especially to East and South East Asia. Internal financial disruptions impact across equity markets and financial institutions. Pretty soon, they connect also with the supply chain networks in production and trade.

US fiscal politics and global financial markets. Fiscal politics in the US always adds nervousness and potential dangers to the world’s capital markets. Disturbances within the US financial markets are transmitted elsewhere, and such developments also can affect global trade and output.

The Biden agenda for economic recovery is now at its critical stage – passage into law by Congress. This program can be summarized in two parts. A reform agenda designed to raise social programs that costs $3.5 trillion, and a $ 1 trillion infrastructure agenda, a total of $4.5 trillion.

The US Congress is a tightly divided legislature, but is on the thinnest of margin – one vote – controlled by the Democrats. The infrastructure program has now passed the Senate because it won bilateral support, but it needs House approval. The large social spending program of the House cannot secure passage in the Senate unless reduced.

Even if the social spending program passes Congress, the Republicans can still play hard-to-get by stalling the increase in the public debt ceiling. This is a never-ending moro-moro drama played by the Republicans and Democrats in recent decades to accentuate their political differences.

Of course, in due time the US Congress will have to raise the debt ceiling to avoid doomsday. If they do not pass it, the US government will fail to pay its debts. This will be catastrophic to the US and the world economy.

Yet, as the drama plays out, the financial markets could get rattled. On this occasion, the stake is how much trimming the Biden spending agenda will accept in order to get the temperature to simmer down.

The size of that spending cut has an impact on global economic recovery.

Security issues in East Asia and the Pacific. For several years now, the South China Sea has become a focal point of geopolitical tension. The militarization of the islands by China in the region has, in fact, put the Philippines at the center of this problem.

Though the tension is high, but not at boiling point, recent acts of China to harass Taiwan (which does not want to become a province of China) have recently raised the temperature more. Chinese airplane maneuvers near Taiwan’s air space reminds us of the early decades of very high tensions between the two Chinas before the mid-1970s.

All these developments produce tensions that could unnerve our delicate position in the region and, of course, harm our economic recovery.

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/