TD Bank Group Chief Economist and Senior Vice President Beata Caranci joins Yahoo Finance Live to discuss China's new COVID measures and how it will impact the global economic outlook as a result.
- Well, as China returns to the forefront with Xi Jinping loosening the reins, our next guest has upgraded her global outlook, saying that this news out of China will lighten the downdraft for the World Economic Outlook. TD Bank Group Chief Economist and Senior Vice President Beata Caranci joins us now.
Welcome to the show. So Beata, when you have this sort of backdrop of these rising cases in China but also the loosening of zero-COVID, how much is that changing the global outlook and the risks that still might lie ahead?
BEATA CARANCI: Yeah, then you got to separate the time period. So I would say in the first quarter of next year, 2023, it's probably going to add some downside risk to the point of your earlier segment that there's going to be some dislocation related to illnesses, health crisis, potential disruptions in the workplace being magnified relative to what we've seen recently under the controlled situation.
However, we know from the experience of other countries this is a fast-moving virus, with a high or not, and you have a period of time where it rises and comes back down. If it follows that same pattern and you have a normalization of activity that can take place by the second and third quarter, this is a population that's had an incredible amount of weight placed on them holding back expenditures, holding back investment. And so once that restraint is removed, there is a lot of pent-up demand that can come through.
Slight problem in an environment globally where you're trying to tap down inflationary pressure. So it actually could be adding an inflationary risk in next year, especially on the commodity price side. But I would say that comes through around the second half of 2023 in particular. So in the near term, some downside risk. But overall for 2023, there could be a tailwind there.
- The tailwind in terms of the economic growth we're likely to see out of China, to your point, on that pent-up demand. But I wonder if you can hone in a bit more on that inflation risk. I mean, how much more upside-- upside sounds positive, but how much more inflation pressure are we likely to see as a result of that increasing demand likely to come through from China in potentially the second half of the year?
- Yeah, and then that question comes back to how everybody else is doing, because Europe is certainly going to be in recession. And the US should be hitting its low period in terms of its economic growth with the pass-through of higher rates really starting to bite consumption patterns at that stage. So there's a little bit of a balancing act happening, and we'll see how that all plays out. That's why it's a risk as opposed to embedded in our forecast at that time.
But we ought to keep it on our radar because it certainly would suggest that anything that comes from other countries and ends up getting imported in the US through that price channel would not be great in an economy that's already looking at a 5% interest rate to cool down that job market and the price pressure. So it's going to be an added layer of complexity for the Fed if we get into that environment. If the global economy is so weak that even with China re-entering you have sufficient weakness elsewhere, that you're netting out about the same place, then you may not see it transpire.
- And Beata, you mentioned the Fed there. We know that they're still keeping an eye on this labor market resilience, still very, very tight. And you're forecasting a low and slow growth model for next year. Break that down for us.
BEATA CARANCI: Yeah, when you think about how to take inflationary pressures out of the US economy, there's really only two ways to do it. You either have a hard landing with almost a V-shaped type recession, deep, but probably not prolonged, maybe two to three quarters, to squeeze out the wage in inflationary pressures. The other alternative is that you end up with a slow and low growth phase, which can be quite painful. It's a stagnant economy in terms of our forecast for a two-year period that sees the unemployment rate steadily rise throughout that two-year period, which is different from what the Federal Reserve is envisioning.
They're envisioning only the unemployment rate rising through next year and then leveling off, whereas we continue to see it, in our forecast, push higher because we ultimately think in an environment where you have vacancy rates as high as they are, and you have unemployment rate as low as you are, you're probably going to have to squeeze out more of those job pressures than they likely are anticipating. So we think at a minimum, you're looking at about a million job losses.
Now, historically, that would be considered a mild recession. It's only mild to the people who don't lose their job, right? So that's our minimum threshold of what we're expecting in this slow and low growth period.
- A lot to look ahead to in the coming year here. Beata Caranci, TD Bank Group chief economist and senior vice president, I appreciate your time today.