Slackflation Beckons as Global Growth Goes Off the Boil

(Bloomberg Opinion) -- How about a little slackflation? Asia's recovery is losing its footing, with potentially significant consequences. Slowing world growth that's not quite stagnant, combined with a prolonged period of uncomfortably quick price increases, might be with us for a while.

U.S. Treasury Secretary Janet Yellen has linked inflation to controlling Covid-19. Fair enough. Vast amounts of stimulus, a steep drop in activity and a rapid snapback are all features of the pandemic era. But her comments Sunday weren't exactly a ringing endorsement of the thesis that high inflation will be temporary, short-lived, or — in Federal Reserve lingo — transitory. For at least the past year, officials the world over have intoned that we need to live with the coronavirus. Do we need to similarly adapt to high levels of inflation? Yellen and White House economic adviser Brian Deese hit the news show circuit in Washington to try to defuse escalating prices as a political issue with the potential to further complicate passage of President Joe Biden's $1.75 trillion spending plan.

Central banks are loath to significantly hasten the removal of easy money lest that response creates as many problems as it solves. Should the Fed accelerate tapering quantitative easing, it may precipitate the type of tantrum it has worked hard to avoid. The Bank of England showed just how hard it is to pull the lever on a rate hike, as opposed to merely mouthing its virtues. In China, policy makers are hamstrung between a slowdown and an aversion to debt binges. By the way, this is a heck of a time to have questions hanging over the leadership of the Fed. A second term for Chair Jerome Powell, once seen almost as a coronation, has become a contest; it's unclear that a plausible replacement would necessarily take a tougher line on inflation.

How about the growth side of the equation? The news from Asia, the part of the world that's routinely been described as the most dynamic and the future of capitalism, isn't encouraging. The pandemic is still taking a severe toll on activity. As long as the virus is around and politicians feel the need to restrict social and business life to deal with it, Covid is going to have a meaningful impact on expansion — where that exists — and prices.

China's coronavirus strategy still hinges on eradicating outbreaks, rather than managing them. That's contributed to a marked cooling of what was rightly praised at the start of the year as a record-shattering recovery. In addition, Beijing’s crackdown on the property market has slowed lending to a sector that accounts for as much as 25% of gross domestic product. Energy shortages have led factories to curb production. China did get some relief Monday, when reports showed retail sales beat estimates. 

In Japan, the economy shrank more than three times as much as anticipated, according to figures released Monday, and has gone backwards in five of the past eight quarters. Consumption dropped as a summer wave of infections led to more emergency restrictions. Prime Minister Fumio Kishida is all but certain to enlarge the stimulus measures he’s planned since campaigning for the top job a few months ago. Truth in advertising is fine. But for such a large economy to retreat into the inertia that plagued it until recently is dispiriting. The country may be looking at yet another lost decade.

Then there's inflation. China is also grappling with a climb in factory-gate and consumer prices. The People's Bank of China is widely expected to ease policy moderately, though it’s reluctant to fuel a fresh wave of debt. While inflation expectations have nudged up a bit in Japan, truly elevated price gains remain more of a fantasy than a prognosis. In Southeast Asia, the numbers are disappointing: Indonesia's growth slowed by around half in the third quarter. Malaysia reported Friday that GDP resumed its contraction.

No doubt, inflation is a pressing political as well as economic issue in Washington. When Joe Manchin, the Democratic senator from West Virginia with the ability to sink Biden’s agenda, is moaning about climbing prices, the administration is right to get apprehensive. But let’s keep one eye on global growth, please. Here's hoping that Asia's tough ride is transitory or, to borrow a now-toxic reassurance from the 2007-2009 global financial crisis, “contained.” 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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