The US Federal Reserve (Fed) and other central banks to fight historically high inflation even as three of the world’s major economic engines (US, Europe and China) are reeling. We are tightening our confidence in The World Bank said Thursday in a new report that warns of rising global recession risks that the global economy is pulling back 50% of support from policymakers as the US and other governments cut spending on pandemic relief. He said he hasn’t gotten any better than at almost any time of the year. .
PGIM Fixed Income Chief Global Economist Daleep Singh said: “We are in a world of constant shock.”
FedEx shares plunged on Friday, pulling across financial markets lower after parcel delivery company chief executive Raj Subramaniam said he expected a “global recession.”
Rate hikes will do little to help Estonia’s 22% inflation, Europe’s worst inflation
The central bank is embarking on its most aggressive rate hike campaign since the late 1990s, according to Citigroup. Central banks in Europe, Canada, Australia and Chile have hiked rates this month, and the Fed is expected to raise rates for the fifth time since his March at next week’s meeting.
Some economists fear that global central banks are misreading the global economy in their rush to raise rates. Last year they resisted action, arguing inflation was temporary. The cumulative effect of multiple countries tightening credit simultaneously could weigh on global growth.
Maurice Obstfeld of the University of California, Berkeley, a former chief economist at international financial institutions, said, “Many central banks, or any central bank, are concerned about how their policies affect the world. I don’t think they’re paying much attention,” he said. currency fund.
Federal Reserve interest rate hikes are boosting the dollar against other major currencies, making imports cheaper for Americans while making it harder for American people and businesses. Allow other countries to buy products made outside their own country.
Major oil importers such as Tunisia have been particularly hard hit as crude is priced in dollars. A strong dollar also hits developing countries with large dollar debts. As the country’s currency loses value against the dollar, more Turkish lira or Argentine pesos will be needed to pay off the debt.
Falling food and fuel costs bring little relief to poor countries
Despite raising its benchmark lending rate by 2.5 percentage points since March, the Fed has failed to slow the economy enough to remove pressure on prices. fell for the fifth week in a row, the latest sign that the labor market is still not comfortable for central banks.
Strong employment is good news for American workers, but many economists say unemployment needs to rise before inflation cools.
The Labor Department reported this week that consumer prices were 8.3% higher than a year ago in August, little changed from 8.5% in July, disappointing investors.
Some analysts expect the Fed to continue raising rates above the 3.8% level. Policymakers have suggested completing the anti-inflation measures in June. On Friday, Deutsche Bank economists said the Fed’s benchmark lending rate could reach 5% next year. This is about double the current level.
Wall Street firms such as Oxford Economics said this week that the Fed would apply the brakes enough to keep prices down, even if it sent the U.S. into a brief recession.
“The combination of prolonged high inflation, more aggressive Fed tightening, and the negative knock-on effect of weakening global conditions will push the U.S. economy into a mild recession,” the firm said in a note to clients. said.
Since 1981, US and global economic growth have been significantly aligned, according to research by Citigroup. In each of the four global recessions since 1980, the United States, which accounts for about a quarter of the world’s Gross Domestic Product (GDP), slowed just before or at the same time as the global economy plunged into recession.
The IMF said this summer that the global economy was at risk of slipping into recession as a result of the aftermath of the Ukraine war, the pandemic and inflation. The IMF alert follows World Bank warnings of the risk of global ‘stagflation’.
There is no official definition of a global recession, but the World Bank uses the term to describe the decline in global GDP per capita. Some economists believe that a widespread decline in a number of indicators such as industrial production, cross-border capital flows, employment and trade, or an economic downturn involving many major economies could trigger a true global recession. said to characterize
“For the second half of this year and early next year, the United States, Canada and Europe are all in recession. Whether or not you call it a global recession is up to you,” said Oxford Economics. said Ben May, Director of Global Macro Research. “But we’re going through a very weak patch. It’s going to feel like a recession.”
Of greatest concern is Europe, which is struggling to adjust to the loss of Russia’s natural gas supply.Moscow reacted to European sanctions Ukraine’s aggression by cutting natural gas shipments to Europe by about 75%, according to Barclays.
As energy prices soared, consumers and businesses across the continent felt the pinch. The European Central Bank, which has kept borrowing costs below zero for years, has raised interest rates twice since July to keep inflation above 9%.
“This is the most dramatic policy shift since the global financial crisis. said Mr.
Choose your economy: a hot labor market or volatile growth
Some economists say broader adjustments are underway. Inflation pressures in the United States and other advanced economies have been tempered for decades by global consolidation, but now external forces are fueling inflation.
Governments in the United States, Europe and China encourage increased domestic production through subsidies and investment restrictions. The Conference Board’s chief economist Dana Peterson says restructuring global supply chains will cost more, as will efforts to accelerate the transition from fossil fuels to addressing climate change. increase.
“The era of ultra-low inflation is probably over,” she said.
Global economic activity contracted in the second quarter for the first time since the early days of the 2020 pandemic. If that contraction turns into a full-blown recession in the coming months, no traditional fix will be available.
With inflation soaring to 40-year highs in the US, Europe, Canada and the UK, central banks are keen to raise interest rates, not cut them.
In 2008, when a bursting housing bubble ignited a global financial crisis, the Chinese government embarked on a wave of nearly $600 billion in infrastructure spending, followed by years of generous lending by state-owned banks. . A study by the Organization for Economic Co-operation and Development in Paris found that the total bailout amounted to more than a quarter of China’s gross domestic product, far more than the US spent on stimulus.
Chinese spending led to orders for factories in the US and Europe, copper mines in Peru and iron ore producers in Australia.
Today, China faces challenges such as a debt-stricken real estate sector and slowing export growth ahead of October’s Communist Party Congress, which is expected to give China’s President Xi Jinping an unprecedented third term in office. I am struggling with my own problems.
The renminbi has also depreciated by about 9% against the dollar this year, hovering around the symbolically important 7 yuan to the dollar.
“China’s leaders are reluctant to use the tools they have used in the past,” Mei said. “China is unlikely to be the consumer of last resort.”