Evergrande may just be the tip of the iceberg. It’s one of 4 major warning signs flashing for the global economy.

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Evergrande is China’s second-biggest property developer.

China’s Evergrande is spooking markets and the global economy faces a range of threats that could derail recovery.
Soaring energy prices are disrupting production; in the background the US and China still aren’t getting along.
With growth slowing and prices hitting multiyear highs, economists are talking about the dreaded „stagflation.”
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The name Evergrande is becoming as famous in 2021 as the name Lehman Brothers was in 2008. The colossal Chinese real-estate developer is wobbling, threatening markets far outside China’s borders. But as big as a $300 billion debt default is, it could just be the tip of the iceberg.

The world’s economy is struggling with higher prices, shipping delays, and widespread shortages. The combination of them could lead to even great struggles ahead.

Four major indicators are flashing red alarm signals, and they could well turn into something worse.

(1) Evergrande saga rattles world markets

Ever since the previously little-noticed American mortgage-backed security market imploded in 2008 and took down Lehman Brothers with it, endangering the world’s financial system, economists have been alert to the „black swan” financial risk, and its cousin, the „gray rhino.”

Evergrande might be just such a rhino, the kind of threat you are aware of, but don’t consider serious until its horns are bearing down on you.

After riding a wave of unbridled borrowing and rapid growth, the company is facing a default on more than $300 billion, and a Chinese government determined not to let it off the hook.

In a matter of weeks, Evergrande has endured a handful of credit downgrades, investor protests, last-minute fundraising pushes, and missed interest payments. The saga immediately roiled global markets. Stocks tumbled on fears that a potential default would slam the Chinese economy and, in turn, slow global growth.

Evergrande has less than a month to make late payments and dodge default. But as deadlines loom and the company struggles to raise cash, the world economy is waiting with bated breath for a sign of the rhino’s stampede being averted.

(2) US-China tensions threaten to grow into a decoupling

The Chinese government’s tough stance on Evergrande is emblematic of its tougher stance on its corporate sector, an issue that has roiled stock markets on both sides of the Pacific.

China’s crackdowns have affected major US-listed tech companies such as ride-hailing app Didi, besides preventing the biggest IPO in history, of billionaire Jack Ma’s Ant Media group. The US response has been to tighten up its own listing rules.

The US will soon unveil its trade policy with China, which Trade Representative Katherine Tai told Politico will „build on” tariffs worth billions of dollars on Chinese imports.

„The era of blinders-on pursuit of ever-deeper economic engagement with China is over, and it won’t be coming back,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said.

The US and China decoupling could be another round of Trump-style tariffs, where prices for Chinese imports would soar as companies pass on the costs to everyday Americans, or it could be a bigger reconstruction of the globalized supply chain. China has also provided US companies with cheap labor for decades. If businesses look elsewhere for their manufacturing needs, higher production costs would raise shelf prices higher still.

(3) Soaring energy prices are destabilizing economies

Decoupling means everything is more expensive, and the changes wrought by the pandemic and shifts in regulatory behavior have made commodity prices way costlier, and less predictable to boot.

Global energy prices have soared this year as producers have struggled to keep up with a rapid rebound in demand after major economies lifted COVID-19 restrictions. In Europe, natural gas prices have risen more than 500% over the last year to record highs.

Oil prices have climbed sharply as users pivot away from natural gas and coal, with Brent crude up around 90% over the last year.

The jump in energy prices has been a key factor driving inflation to multi-year highs in advanced economies and making central banks reconsider their stimulus packages. The Federal Reserve and Bank of England have now said they could well tighten monetary policy sooner rather than later, spooking markets.

Energy shortages have also disrupted production in China, weighing on growth in the world’s second-biggest economy and threatening the supply chains of huge companies such as Apple.

(4) The specter of stagflation

Experts fear supply bottlenecks will fuel a dangerous cocktail of weak economic growth, high unemployment, and stifling price growth. That brings up the biggest risk of all to the world’s economy: the dreaded „stagflation” last seen in the 1970s, when stagnant growth and inflation combined to wreak misery on millions’ livelihoods.

Policymakers looking to curb inflation risk driving unemployment even higher, while attempts to boost hiring with low rates could spark even stronger inflation. The situation is already confounding experts. Rising prices are „a function of supply-side bottlenecks over which we have no control,” Federal Reserve Chair Jerome Powell told the House Financial Services Committee on Thursday.

„As it continues, bottlenecks, hiring difficulties, and other constraints could, again, prove to be greater and more enduring than anticipated, posing upside risks to inflation,” he said in a separate Senate hearing on Tuesday.

Evergrande, then, is simply the most visible risk facing the global economy. The iceberg standing in the way of recovery is larger than it first appears. The energy crunch, the transPacific decoupling, and the ghost of stagflation are monsters lurking just under the waves.

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