Can the U.S. and China Save the Economies of Europe and the UK?

Over the last few weeks, I have frequently expressed the view here that the chances of the U.S. avoiding a serious, damaging recession have increased. There is still the danger of a shrinking economy, but a scenario where the Fed slows and even stops rate hikes earlier than previously forecast and the continued strength in the labor market is able to sustain things until they do is now foreseeable. Meanwhile, the news coming out on the other side of the Atlantic today has made avoiding a collapse in America even more important, but also more challenging.

In the UK, a 0.2% contraction in third quarter GDP has even the usually understated BBC saying that “Recession Looms,” and in the Euro Zone, the outlook is gloomy, even though the latest GDP data showed an economy that was still growing despite the shock to energy prices and supply caused by the Russian war in Ukraine. More worrying in some ways, the EU Commission’s Autumn 2022 Economic Forecast, released this morning, says both that “growth [is] set to significantly contract” and “inflation [has] yet to peak.”

That sounds a lot like stagflation, where prices are rising even as an economy is contracting. It is the economic worst of both worlds, and it can take countries many years to recover from even a fairly short period of stagflation.

Given the inherent interdependence of developed global economies, does this mean that a recession is back to being the most likely outcome for America? Maybe not. It could work the other way around, where rather than European weakness dragging the U.S. down, a soft landing and quick recovery here holds Europe up just enough to avoid disaster. Especially as there is another country that could also provide a boost and give the struggling UK and EU a leg up: China.

At first glance, that may seem unlikely. This week, the fact that Chinese exports had actually decreased, rather than increased as was expected, hardly looks encouraging. However, there are outside influences, most notably Russian aggression, that are causing most of the current issues in Europe, limiting the chances of an engineered turnaround. In China, on the other hand, we can be pretty sure that the slowdown is directly attributable to one thing, the zero-covid policy, and that is something that is under the control of the government and is therefore quite easily reversible. There is news this morning that the covid-related restrictions in China are indeed being eased.

The significance of that cannot be overstated. Demand in China, where growth has been a major driver of world growth for decades, has been deliberately and artificially suppressed in a mini, more contained version of what we saw throughout world in 2020. What became clear when those restrictions were lifted was that artificially suppressed demand like that doesn’t go away; it is just pent up and can be a powerful stimulus when it is released.

That raises hopes for help from China, and yesterday’s U.S. CPI numbers raise hopes for a soft landing here. Yes, I know that there are some high-profile layoffs at major companies here in the States, but they are more about company-specific issues than U.S. economic weakness. The tech sector, and social media companies in particular, are adjusting to a new normal, but outside of that, things don’t look too bad. Unemployment has remained stubbornly low and there are still some big, job-creating investments being made.

Europe and the UK are sinking fast, but there may be help on the way from two very different directions. The U.S. economy is doing its thing, showing the kind of resiliency that free market capitalism breeds while at the other end of the scale, government manipulation of the economy in China allows them to turn the economy on and off, and they are beginning to turn growth back on. That may still not turn out to be enough to rescue the economies across the pond, but at least it means there is hope.

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