Bloomberg: Recession risks competing with hopes of resilience in global economic outlook

The rapid inflation of recent decades and the consequent rush by central banks to raise interest rates fuel fears of a recession in financial markets – worries exacerbated by the effects of coronavirus blockades on China and the war in Ukraine .

Just last week, the United States and the United Kingdom recorded the fastest pace of inflation since the early 1980s, and the central banks of Canada and New Zealand provided a model for the US Federal Reserve and other banks. raising interest rates by 50 basis points for the first time in 22 years.

Bank of America Corp. reported that fund managers were the most pessimistic ever about growth prospects and JPMorgan Chase & Co. increased its reserves to shield itself against an economic downturn.

Sri Lanka and Pakistan, meanwhile, are plunged deeper into crisis as the United Nations warns of a “perfect storm” for developing countries as commodity prices plummet as the World Trade Organization cuts its trade prospects. and searches for the “recession” on Google and the Bloomberg Terminal have skyrocketed.

In such a context, policymakers are heading to Washington this week for meetings of the International Monetary Fund and the World Bank. The Fund already states that the war means it will downgrade its forecasts for 143 economies this year – which represent 86% of the world’s gross domestic product.

“We are facing a crisis upon a crisis,” said IMF Managing Director Kristalina Georgieva.

“For the world economy, the combined impact of war and the coronavirus will be a year of lower growth, higher inflation and higher uncertainty. To reach a recession, we will have to see more shocks. Russia cutting off gas supplies to “Europe or the Chinese padlock extending from Shanghai to other major cities are potential catalysts,” said Tom Orlik, chief economist at Bloomberg Economics.

But there is reason to believe that resilience, even with a dose of stagnant inflation instead of global recession, may be what is needed, at least for rich countries.

Thanks to pandemic-era incentives, households in developed markets still account for 11% to 14% of savings income, according to a JPMorgan Chase analysis sent to customers last week.

Leverage has been at a low level for many decades and income is growing at an annual rate of about 7% amid tightening labor markets, catalysts for a possible recovery in the second half of the year. In the US, last week’s reports on retail sales and the consumer climate offered hope that not all consumers would retire despite price shocks.

“I see more reason for the global economy to slow down than to accelerate again,” said Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and consulting firm in London. “However, whether it will fall into recession is a completely different story, simply because the downturn around the world will have to release huge rising demand, helping to offset much of the headwinds.” Nevertheless, this robustness is to be tested.

The fastest inflation in recent decades around the world has already begun to repel many consumers, especially those who see higher food and fuel bills. About 84% of Americans plan to cut spending due to higher prices, according to a Harris poll for Bloomberg News.

Central bankers are also pushing up interest rates, with the Fed more likely to raise its benchmark by half a point next month for the first time since May 2000 and begin reducing its bond portfolio. President Jerome Powell is expected to address the prospect of appearing on Thursday.

One risk is that policymakers will turn from reacting too slowly to rising inflation to tightening as their economies weaken or if it turns out that inflation is due to supply chain problems that monetary policy cannot address. Fund managers who participated in the BofA survey saw an 83% risk of policy error.

“The reason we are seeing much slower growth is that central banks need to respond by tightening policy from the very loose situation we have today, so that financial conditions are reduced and that will reduce demand,” Karen said. Dynan, Senior Fellow at the Peterson Institute for International Economics.

In a harbinger of the IMF’s new economic outlook to be released on Tuesday, Danan estimated that global growth would slow to 3.3% this year and next year, up from 5.8% in 2021.

The big developed economies will only expand moderately this year and will weaken further in 2023, he said. Large emerging markets face “divergent” prospects with India improving and China struggling with padlocks and falling real estate.

The pace of developments this year has taken policymakers by surprise.

White House Chief Financial Officer Brian Deese said last week that the United States was facing a lot of uncertainty. Chinese Premier Li Keqiang has said there is an urgent need for government incentives.

Russia’s invasion of Ukraine has overshadowed a deepening slowdown in China as the government continues its “zero-sum” approach to controlling Covid-19, a policy that has halted production in the Shenzhen and Shanghai processing and financial centers and kept millions of people in their homes.

This approach, however, is likely to push growth to 5% this year, below the official target of around 5.5%.

Global supply lines still recovering from the pandemic could also be hit further if China does not control the virus soon.

Giant Manufacturing Co. is among the producers who feel disturbed. Waiting up to two years for bicycle parts, President Bonnie Tu told Bloomberg Television.

“This is a hell of a job,” she said.