HONG KONG (BLOOMBERG) - The global economy is entering the final quarter of 2021 with a mounting number of headwinds threatening to slow the recovery from the pandemic recession and prove policymakers' benign views on inflation wrong.
The spreading Delta variant of the coronavirus continues to disrupt schools and workplaces. US lawmakers are wrangling over the debt ceiling and spending plans. China is suffering an energy crunch and pursuing a regulatory crackdown, while markets remain on edge as China Evergrande Group struggles to survive. Fuel and food costs are soaring worldwide, combining with congested ports and strained supply chains to elevate price pressures. Labour shortages continue to plague some employers.
Although the expansion seems intact, such a backdrop is fanning fears of a mix of weaker growth and faster inflation to come, threatening to complicate nascent efforts by central banks to dial back stimulus without rattling markets.
"Expectations of a swift exit from the pandemic were always misplaced," said Mr Frederic Neumann, co-head of Asian economic research at HSBC Holdings in Hong Kong. "Full recovery will be measured in years, not quarters."
Economists at Barclays Bank have warned of "gusts of headwinds that could eventually take their toll on activity".
Here is a breakdown of the major risks:
1. China crunched
China's energy travails have forced manufacturers to curb production and prompted economists to cut their growth forecasts. Bloomberg Economics expects the power shortages to have the biggest hit to expansion since a nationwide lockdown when the pandemic first erupted.
Regions impacted by the curbs represent about two-thirds of the economy and include the top five provinces in terms of gross domestic product - Guangdong, Jiangsu, Shandong, Zhejiang and Henan. In a sign of what is to come, factory activity contracted in September for the first time since the pandemic began.
That is compounding a drag from the crisis engulfing Evergrande, the world's most indebted developer, and a broader slowdown in the all-important housing sector. President Xi Jinping's push for tighter regulations of industries including technology is also unnerving investors.
2. Costlier food and energy
China's energy problems also risk triggering a renewed surge in world agriculture and food prices, as it means the country is set for a difficult harvest season from corn and soy to peanuts and cotton.
Over the past year, Beijing has imported a record amount of agricultural products because of a domestic shortage, driving prices and global food costs to multi-year highs. A United Nations index is up 33 per cent over the past 12 months. At the same time, some gas, coal, carbon and electricity benchmarks are hitting records.
The price of oil passed US$80 a barrel for the first time in three years and natural gas is the costliest in seven, helping to push the Bloomberg Commodity Spot Index to its highest level in a year. TotalEnergies chief executive Patrick Pouyanne said the gas crisis that is affecting Europe is likely to last all winter.
It could get even worse. Bank of America analysts are telling clients there is a chance of oil reaching US$100, spurring an economic crisis.
3. Supply squeezed
With the northern hemisphere winter approaching, the Delta variant remains another worry. That helps explain why congestion is building at key crossroads for international commerce, from ports in Shanghai and Los Angeles to rail yards in Chicago and warehouses in Britain.
Retailers, including Costco Wholesale in the United States, are ordering everything possible to ensure shelves are stocked, particularly for the late-year boost of holiday shopping.
Manufacturers, meanwhile, are having trouble sourcing key parts such as semiconductors, chemicals and glass. Dubai's DP World, one of the biggest global port operators, expects bottlenecks that have rattled global trade flows to continue for at least another two years.
There is also a shortage of labour in some industries, with the coming week's US payrolls report providing an insight into how much of a problem that was for firms in September.
4. Policy problems
The shine is also coming off US economic policy as a locomotive for the global recovery. While President Joe Biden swerved a disruptive shutdown of the federal government for now through a stopgap funding Bill, fractured talks continue on his US$4 trillion (S$5.4 trillion) economic agenda with deep divisions among Democrats on the way forward.
Compromise on the shutdown came after Treasury Secretary Janet Yellen warned that her department will effectively run out of cash around Oct 18 unless Congress suspends or increases the federal debt limit. Failure to do so would trigger both a recession and a financial crisis, Dr Yellen said.
Globally, fiscal policy support is set to slow into 2022 after governments ran up the biggest debts since the 1970s.
5. Monetary policy
Mr Biden and Dr Yellen must also decide whether to hand a second term to Federal Reserve chairman Jerome Powell, a decision that could also roil markets.
For Mr Powell and his international counterparts, the combination of slowing growth and stubborn inflation is a challenge. Last Friday alone saw news of the fastest euro-area inflation in 13 years and a US gauge rose the most on an annual basis since 1991.
For now, Mr Powell and European Central Bank president Christine Lagarde are voicing cautious optimism that inflation will ease. But economists are asking at what point does transitory become more persistent.
And that makes plans to reduce bond purchases or raise interest rates a risky proposition. Many Latin American central banks and some in eastern Europe have already hiked borrowing costs, Norway just became the first developed nation to do so and the Fed is signalling it will pare its bond-buying programme as soon as November.
Deutsche Bank strategist Jim Reid reckons the world economy may be facing its most hawkish period for monetary policy in a decade.
Ms Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis, said: "Central banks are playing with fire by tapering to avert inflationary pressures without being fully sure of where we stand in the cycle."