In this Jan 25, 2021 photo, shipping containers at the Port of Ipswich, operated by Associated British Ports (ABP) Holdings Ltd, against a backdrop of residential housing in Ipswich, UK. (CHRIS RATCLIFFE / 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 policy makers’ benign views on inflation wrong. 

Globally, fiscal policy support is set to slow into 2022 after governments ran up the biggest debts since the 1970s

The spreading delta variant continues to disrupt schools and workplaces. US lawmakers are wrangling over the debt ceiling and spending plans.

Fuel and food costs are soaring worldwide, combining with congested ports and strained supply chains to elevate price pressures. Labor 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 Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. “Full recovery will be measured in years, not quarters.” 

Economists at Barclays Bank Plc warned of “gusts of headwinds that could eventually take their toll on activity.” 

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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 the UK.

Retailers including Costco Wholesale Corp in the US 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 will continue at least for another two years.

There is also a shortage of labor 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.

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 $4 trillion economic agenda with deep divisions among his 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 financial crisis, Yellen said.

Globally, fiscal policy support is set to slow into 2022 after governments ran up the biggest debts since the 1970s. 

Monetary policy 

Biden and Yellen must also decide whether to hand a second term to Federal Reserve Chairman Jerome Powell, a decision which could also roil markets.

For Powell and his international counterparts, the combination of slowing growth and stubborn inflation is a challenge. 

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, Powell and European Central Bank President Christine Lagarde are voicing cautious optimism that inflation will ease. But economists are asking at what point transitory becomes more persistent.

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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 signaling it will pare its bond-buying program as soon as November.

Deutsche Bank AG strategist Jim Reid reckons the world economy may be facing its most hawkish period for monetary policy in a decade.

“Central banks are playing with fire by tapering to avert inflationary pressures without being fully sure of where we stand in the cycle,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis.