The world economy is showing signs of a rapid downshift as it contends with a series of shocks – some of them self-inflicted by policymakers – increasing the likelihood of another global recession and the danger of major financial disruptions, reports the Straits Times.
Period of elevated risk
“We’re living through a period of elevated risk,” former United States treasury secretary Lawrence Summers told Bloomberg Television, for whom he is a paid contributor. “In the same way that people became anxious in August of 2007, I think this is a moment when there should be increased anxiety.”
At the heart of the strain: The fallout from the most aggressive hiking of interest rates since the 1980s.
Having failed to foresee the surge in inflation to multi-decade highs, the United States Federal Reserve and most peers are now lifting rates at speed in a bid to restore price stability and their own credibility.
Evidence of the impact – and of the blow to consumers’ purchasing power from soaring prices – is mounting quickly.
Avoiding pulling back
In the past several days, Nike reported a surging stockpile of unsold product, FedEx shocked with a warning on delivery volumes and key chipmaker South Korea saw the first drop in semiconductor output in four years as demand retreats.
Inflation data showcase the need for, as Fed vice-chair Lael Brainard put it on Friday, “avoiding pulling back prematurely” on tightening.
She spoke shortly after the Fed’s preferred measure of prices jumped more than forecast. Earlier, data showed euro zone inflation has punched into double digits.
Layered on top of continuing reverberations from the Russian invasion of Ukraine, the spreading economic gloom is sowing fear in financial markets, creating its own worrying dynamic.
Global economy is in the eye of a new storm
A rapidly appreciating dollar, supercharged by the Fed, may help cool US inflation, but it drives it up elsewhere by weakening other currencies – pressuring the authorities to restrain their own economies.
“The global economy is in the eye of a new storm,” Reserve Bank of India governor Shaktikanta Das said on Friday after lifting rates again.
Prospects for a second global recession so soon after the 2020 downturn triggered by the Covid-19 pandemic were hardly apparent a year ago.
But Europe’s Russian-induced energy crisis, and China’s deepening property slump and continued Covid-Zero approach were not part of the consensus outlook.
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Source: The Straits Times
