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Recession risks meet hopes for resilience in global economic outlook

The fastest inflation in decades and a subsequent rush by central banks to raise interest rates are stoking recession fears in financial markets, concerns that are compounded by the impact of China’s aggressive coronavirus lockdowns and war. in Ukraine.

In the last week alone, the US and UK saw the fastest-moving inflation since the early 1980s and the central banks of Canada and New Zealand provided a model for the US Federal Reserve and others by raising rates 50 basis points for the first time in 22 years.

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

Meanwhile, Sri Lanka and Pakistan fell deeper into crises as the United Nations warned of a “perfect storm” for developing countries as commodity prices rise, the World Trade Organization cut its outlook for the trade and search for “recession” on Google and the Bloomberg Terminal. spiked.

Against that backdrop, policymakers head to Washington this week for meetings of the International Monetary Fund and the World Bank. The Fund is already saying that the war means it will lower its forecasts for 143 economies this year, accounting for 86% of global gross domestic product.

“We are facing a crisis on top of another crisis,” said IMF Managing Director Kristalina Georgieva.

But there are also reasons to think that resilience, albeit with a touch of stagflation rather than global recession, may be the order of the day, at least for rich nations.

Thanks to the stimulus of the pandemic era, households in developed markets still have 11% to 14% of income in savings, according to a JPMorgan Chase analysis sent to clients last week.

Leverage is at multi-decade lows and earnings are advancing at an annual rate of around 7% amid tighter labor markets, catalysts for a possible rebound in the second half of the year. In the US, last week’s reports on retail sales and consumer confidence offered hope that all consumers won’t back down despite price shocks.

“I see more reason for the global economy to slow than for it to speed up again,” said Stephen Jen, who runs Eurizon SLJ Capital, a hedge fund and advisory firm in London. “However, whether it will fall into a recession is a completely different story, simply because the decline in Covid around the world should trigger a lot of pent-up demand, helping to offset a good part of the headwinds.”

Still, that robustness is going to be tested.

The fastest inflation in decades around the world is already starting to drive away many consumers, especially those witnessing higher food and fuel bills. About 84% of Americans plan to cut spending because of higher prices, according to a Harris poll for Bloomberg News.

Central bankers are also pushing interest rates higher with the Fed now more likely to raise its benchmark by half a point next month for the first time since May 2000 and start cutting its bond portfolio. Chairman Jerome Powell is expected to address the prospect in an appearance on Thursday.

One danger is that policymakers move from reacting too late to rising inflation to tightening too much as their economies weaken or if inflation turns out to be driven by supply chain problems that monetary policy cannot address. Fund managers surveyed by BofA saw an 83% risk of a policy error.

“The reason we’re seeing much slower growth is that central banks need to respond by tightening policy from their current very easy state, so that financial conditions tighten and that limits demand,” said Karen Dynan, researcher principal of the Peterson Institute. of International Economy.

In a precursor to the IMF’s new economic outlook to be released on Tuesday, Dynan estimated global growth will slow to 3.3% this year and next, compared with 5.8% in 2021.

Large advanced economies will expand only moderately this year and weaken further in 2023, it said. Big emerging markets face a “divergent” outlook with India improving and China grappling with lockdowns and a housing downturn.

The pace of events this year has caught policymakers off guard.

Top White House economic adviser Brian Deese said last week that the United States faces a lot of uncertainty. Chinese Premier Li Keqiang said there is an urgent need for government stimulus.

Russia’s invasion of Ukraine has overshadowed a deepening slowdown in China as the government continues its “dynamic zero” approach to controlling Covid-19, a policy that has stalled production in financial and manufacturing hubs. of Shenzhen and Shanghai and has kept millions of people at home.

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

Global supply lines that were still reeling from the pandemic may also suffer a further setback if China doesn’t get the virus under control soon.

Giant Manufacturing Co. is among the producers feeling the disruption. It’s waiting up to two years for bike parts, President Bonnie Tu told Bloomberg Television.

“It’s a great job,” he said.

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