The Fed and other central banks are tightening credit to fight historically high inflation even as three of the world’s main economic engines – the United States, Europe and China – are collapsing. As the United States and other governments also cut spending on pandemic relief measures, the global economy is receiving less support from policymakers than at almost any time in 50 years, said the World Bank in a new report on Thursday that warned of rising risks of a global recession. .
“I see a bumpy road ahead,” said Daleep Singh, chief global economist for PGIM Fixed Income. “We are in a world where the shocks are going to keep coming.”
FedEx shares plunged on Friday, also dragging broader financial markets lower, after the package delivery company’s chief executive, Raj Subramaniam, said he expected a “global recession.”
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Central banks, meanwhile, are engaged in the most aggressive rate hike campaign since the late 1990s, according to Citigroup. This month, central banks in Europe, Canada, Australia and Chile raised rates, and the Fed is expected to do so for the fifth time since March when it meets next week.
Some economists worry that the world’s central bankers are misreading the global economy in their rush to raise rates, just as they did – in the opposite direction – last year when they insisted inflation would be temporary and resisted action. The cumulative effects of credit crunches in several countries at the same time could strangle global growth.
“I don’t really feel like a lot of central banks are paying much attention to how their policies affect the rest of the world,” said Maurice Obstfeld of the University of California at Berkeley, the former economist in head of the International Monetary Fund.
Fed rate hikes push the dollar higher against other major currencies, making imported goods cheaper for Americans, while making it harder for individuals and businesses to other countries to buy products made outside their borders.
Major oil importers like Tunisia have been particularly hard hit, since the price of crude is in dollars. The strength of the greenback is also hurting developing countries that have large debts in dollars. As their local currencies lose value against the dollar, more Turkish liras or Argentine pesos are needed to pay off the debt.
Falling food and fuel prices offer little relief to poorer countries
Despite raising its policy rate by two and a half points since March, the Fed has not been able to slow the economy enough to ease the pressure on prices. On Thursday, initial jobless claims fell for the fifth week in a row, the latest sign that the labor market remains too hot for the central bank’s comfort.
While strong hiring is good news for American workers, many economists have said unemployment will have to rise before inflation cools.
The Labor Department’s report this week that consumer prices in August were 8.3% higher than a year ago – little change from July’s 8.5% – disappointed investors. investors.
Some analysts expect the Fed to continue climbing beyond the 3.8% level that policymakers suggested in June to complete their anti-inflationary work. On Friday, Deutsche Bank economists said the Fed’s key rate could hit 5% next year, about double the current level.
Wall Street firms such as Oxford Economics said this week that the Fed would apply the brakes hard enough to contain prices, even if it sent the United States into a brief downturn.
“Higher inflation for longer, more aggressive monetary policy tightening by the Fed, and the negative fallout from a weakening global backdrop will combine to push the U.S. economy into a mild recession,” the statement said. company in a note to customers.
Since 1981, US and global growth have largely moved in tandem, according to a study by Citigroup. In each of the four global recessions since 1980, the United States — which accounts for about a quarter of global gross domestic product, or GDP — has slowed either just before the global economy fell into a slump or at the same time.
The IMF said this summer that the global economy was at risk of sliding into recession due to aftershocks from the war in Ukraine, the pandemic and inflation. The IMF alarm followed a warning from the World Bank about the risk 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 decline in global GDP per person. Some economists argue that a sharp decline in a number of parameters, such as industrial production, cross-border capital flows, employment and trade, or an economic recession involving a large number of major economies distinguishes a true recession world.
“We have the United States, Canada and Europe in recession in the second half of this year and early next year. Whether you call it a global recession or not is up to the viewer,” said Ben May, director of global macroeconomic research at Oxford Economics. “But we are going through a very weak period. It’s going to look like a recession.
The big concern is Europe, which is struggling to adjust to the loss of Russian natural gas supplies. Moscow reacted to European sanctions after the invasion of Ukraine by reducing natural gas shipments to Europe by around 75%, according to Barclays.
As energy prices soared, consumers and businesses across the continent felt the pinch. After years of keeping borrowing costs below zero, the European Central Bank has hiked rates twice since July to rein in inflation that tops 9% – and plans further such measures despite the weakening economy.
“This is their most dramatic policy change since the global financial crisis. The energy supply shock is hitting them much harder than the United States,” said economist Carmen Reinhart of Harvard’s Kennedy School of Government.
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Some economists say a broader adjustment is underway. After decades in which global integration limited 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 greater domestic production through subsidies and investment restrictions. Overhauling global supply chains will cost more, as will efforts to accelerate the transition from fossil fuels to fight climate change, said Conference Board chief economist Dana Peterson.
“The days of ultra-low inflation are probably 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 contraction turns into a full-blown recession in the coming months, traditional solutions will not be available.
As inflation hits near 40-year highs in the US, Europe, Canada and the UK, central bankers intend to raise rates, not cut them – the usual remedy for a low growth.
In 2008, when an imploding real estate bubble triggered a global financial crisis, the Chinese government stepped up a nearly $600 billion wave of infrastructure spending, followed by years of generous funding by state banks. The total bailout accounted for more than a quarter of China’s gross domestic product, far more than the United States spent on the stimulus, according to a study by the Organization for Economic Co-operation and Development in Paris.
Chinese spending has 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 a debt-ridden real estate sector and sluggish export growth – ahead of a sensitive Communist Party congress in October, which is expected to grant Chinese President Xi Jinping a third term without previous.
This year, the yuan has also fallen almost 9% against the dollar and is near the symbolically important level of 7 yuan for a greenback.
“Chinese leaders are more reluctant to use the levers they’ve used in the past,” May said. “China is less likely to be the spender of last resort.”