The Federal Reserve and other central banks are tightening credit to fight historically high inflation even as three of the world’s major economic engines – the United States, Europe and China – are faltering. With the United States and other governments also slashing spending on pandemic relief measures, the global economy is getting less support from policymakers than it did at almost any time in 50 years, World Bank He said Thursday in a new report that warned of the rising risks of a global recession.
“I see a bumpy road ahead,” said Dalip Singh, chief global economist at PGIM Fixed Income. “We are in a world where the shocks will continue.”
FedEx stock fell on Friday, dragging the broader financial markets as well, after the CEO of the parcel-delivery company, Raj Subramaniam, said he expects “global recession. “
Meanwhile, central banks are engaged in the most aggressive rate hike campaign since the late 1990s, according to Citigroup. This month, the central banks of Europe, Canada, Australia and Chile raised interest rates, and the Federal Reserve is expected to do so for the fifth time since March at its meeting next week.
Some economists fear that the world’s central bankers will misread the global economy in their rush to raise interest rates, just as they have – on the contrary – Last year when they insisted that inflation would be temporary, they resisted acting. The cumulative effects of many countries’ tightening of credit at the same time could stifle global growth.
said Maurice Obstfeld of the University of California at Berkeley, former chief economist at the International Monetary Fund.
Rising interest rates by the Fed is driving dollar against other major currencies, making imported goods less expensive for Americans, while making it more difficult for people and businesses in Other countries to bear the cost of products made outside their borders.
Major oil importers such as Tunisia have been hit particularly hard, as crude is priced in dollars. The dollar’s strength also hurts developing countries that have large dollar debts. As their local currencies lose value against the dollar, it takes more Turkish lira or Argentine peso to make debt payments.
Despite raising the benchmark lending rate by two and a half points since March, the Fed has not been able to slow the economy enough to relieve pressure on prices. Thursday, Unemployment Complaint Rates It fell for the fifth week in a row, in the latest indication that the labor market is still too hot to comfort the central bank.
Although strong employment is good news for American workers, many economists said unemployment will need to increase before inflation subsides.
The Labor Department’s report this week that consumer prices in August were 8.3 per cent higher than a year ago – a slight change from 8.5 per cent in July – disappointed investors.
Some analysts expect the Fed to continue rising beyond the 3.8 per cent level Policymakers suggested in June that they continue their work to combat inflation. On Friday, economists at Deutsche Bank said the Fed’s benchmark lending rate could reach 5 percent next year — nearly double the current level.
Wall Street firms such as Oxford Economics said this week that the Fed will hit the brakes hard enough to bring down rates even if it sends the US into a short recession.
“Higher inflation against a longer period, more aggressive federal monetary policy tightening and negative spillovers from the weak global background will combine to push the US economy into a mild recession,” the company said in a note to clients.
Since 1981, growth in the United States and the world has largely moved in tandem, according to Citigroup research. In each of the four global recessions since 1980, the US — which accounts for a quarter of global GDP, or gross domestic product — has slowed either just before the global economy collapsed, or at the same time.
The International Monetary Fund said this summer that the global economy is at risk of sliding into recession as a consequence of the crisis. The war in Ukraineepidemic and inflation. The IMF’s warning came on the heels of the World Bank warning of the risks of global “stagflation,” a toxic combination of persistently high prices and anemic growth.
There is no official definition of a global recession, although the World Bank uses the term to describe a decrease in global GDP per person. Some economists say that a broad decline in a number of measures, such as industrial production, cross-border capital flows, employment and trade, or an economic stagnation involving a large number of major economies characterizes a true global recession.
“We have both the US, Canada and Europe in recessions during the second half of this year and early next year. Whether you call that a global recession or not is in the eye of the beholder,” said Ben May, director of global macroeconomic research at Oxford Economics. Too weak. It will feel like a stagnation.”
The biggest concern is Europe, which is struggling to adapt to the loss of Russian natural gas supplies. Moscow responded to European sanctions after that Invading Ukraine by slashing natural gas shipments to Europe by nearly 75%, according to Barclays.
With energy prices soaring, consumers and businesses on the continent are feeling the pinch. After years of keeping borrowing costs below zero, European Central Bank He raised interest rates twice since July to curb inflation above 9 per cent – and plans more such moves despite the weakening economy.
It is the most dramatic shift in policy since the global financial crisis. Economist Carmen Reinhart of Harvard University’s Kennedy School of Government said:
Some economists say a broader adjustment is underway. After decades during which global integration curbed price pressures in the United States and other advanced economies, external forces are now fueling inflation.
Governments in the United States, Europe, and China encourage increased domestic production through subsidies and investment restrictions. It will cost more to reshape global supply chains, as will efforts to accelerate the transition from fossil fuels to address climate change, said Dana Peterson, the Conference Board’s chief economist.
“Maybe the days of ultra-low inflation are over,” she said.
Global economic activity contracted in the second quarter for the first time since the early days of the pandemic in 2020. If this downturn turns into a full-blown recession in the coming months, conventional solutions will not be available.
With inflation raging near 40-year highs in the US, Europe, Canada and the UK, central bankers are bent on raising interest rates, not lowering them – the usual cure for low growth.
In 2008, when an exploding housing bubble sparked a global financial crisis, the Chinese government ramped up a wave of nearly $600 billion in infrastructure spending, followed by years of generous funding by state banks. The bailout totaled more than a quarter of China’s gross domestic product, far more than the United States spent on stimulus, according to a study by the Organization for Economic Co-operation and Development in Paris.
Chinese spending translated into orders for factories in the United States and Europe, copper mines in Peru and iron ore producers in Australia.
Today, China is preoccupied with its own problems – including an indebted real estate sector and weak export growth – ahead of a sensitive Communist Party congress in October, which is expected to give Chinese President Xi Jinping an unprecedented third term.
This year the yuan has also fallen nearly 9 percent against the dollar and is swinging close to the symbolically important level of 7 per dollar.
“Chinese leaders are more reluctant to use the levers they have used in the past,” May said. “China is unlikely to be the last spender.”
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