Three bad news for global economy: Delta variant, overheated economy, possible monetary policy change

Posted on : 2021-07-21 17:38 KST Modified on : 2021-07-21 17:38 KST
Also worrisome is the fact that various governments have already used many of the economic stimulus measures at their disposal
(provided by Yonhap News)
(provided by Yonhap News)

The market’s confidence in the recovery of the global economy is wavering. Inflated hopes about an economic recovery are quickly being deflated because of concerns about the spread of the Delta variant of the coronavirus and the economic slowdown that Delta could bring.

New York stock indices sank across the board Monday. The S&P 500, which tracks large companies, fell by 1.59%, to 4,258.49, while the tech-heavy Nasdaq closed the day at 14,274.98, down 1.06%. International oil prices also dipped below US$70 per barrel. Risk-shy investors moved their money into bonds, sending the yield on 10-year Treasuries to 1.194%, 0.1 point lower than the previous week.

South Korean stock exchanges saw similar volatility on Tuesday. The benchmark Kospi fell 0.35% points from the previous day, closing at 3,232.70, while the dollar-won exchange rate also rose 2.6 points by the end of the day to 1,150.4 won. That was the highest closing rate in nine months, since Oct. 8, 2020, when a dollar was trading for 1,153.3 won.

There are three main reasons for this sudden lurch in the market, which had been worried that the economy was overheating just a few short weeks ago.

First, there are growing fears that global economies will shut down again amid the resurgence of COVID-19. The US is being swept by concerns about Delta as its daily caseload of COVID-19 patients recently exceeded 30,000 for the first time since mid-May.

As Delta surges in countries across Europe, the continent has become the first to report a total of 50 million cases of COVID-19.

In addition, the market is plagued by fears that the US economy has crested and will move down from there. Economists surveyed by the Wall Street Journal on Sunday said the US growth rate for the year peaked this spring. They also predicted that the US’ annual growth rate will hit 6.9% this year but will slow to 3.2% next year.

Amid those circumstances, market anxiety is also being kindled by the fact that governments in a range of countries have nearly exhausted their options for economic stimulus. If the global economy were to unexpectedly stumble, those governments would find it hard to adopt the bold monetary and fiscal policies they used last year.

Central banks are already hard-pressed to maintain loose monetary policy because of the problems with asset markets and household debt, along with sharp inflation. Since the beginning of the year, market players have been afraid that the Federal Reserve would curtail loose monetary policy sooner than planned.

The market is likely to remain chaotic until this uncertainty passes. The most crucial variable is the spread of the Delta variant.

But others are holding to a wait-and-see attitude about whether the US economy has reached peak growth. Many think that growth will remain at a decent level even if the economic recovery slows.

“We’re past the peak for growth, but that doesn’t mean [. . .] that we’re poised to then drop off sharply,” said Ellen Zentner, chief economist at Morgan Stanley.

“We’ve moved into the more moderate phase of expansion.”

By Jun Seul-gi, staff reporter

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