Home Economy Global economy weakening amid inflation fight, war, and lingering pandemic

Global economy weakening amid inflation fight, war, and lingering pandemic

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SATURDAY, OCTOBER 19, 2019 WASHINGTON DC. 2019 ANNUAL MEETINGS. Development CommitteerrWorld Bank Group President David Malpas, International Monetary Fund Managing Director Kristalina Georgieva. Photo: World Bank / Franz Mahr

Stubbornly high inflation has Wall Street worried that the Federal Reserve will respond by raising interest rates until the United States tumbles into recession, taking the weakening global economy with it.

While analysts say the U.S. economy grew in the third quarter, signs of trouble are multiplying, here and abroad. Higher mortgage rates are chilling the U.S. housing market; energy shortages are hurting German factory output; and recurring coronavirus lockdowns are hobbling Chinese businesses.

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 sputtering. With the United States and other governments also reducing spending on pandemic relief measures, the global economy is getting less support from policymakers than at almost any time in 50 years, the World Bank said on Thursday in a new report that warned of rising global recession risks.

“I see a bumpy path ahead,” said Daleep Singh, chief global economist for PGIM Fixed Income. “We’re in a world in which the shocks are going to keep coming.”

FedEx’s stock plunged Friday, pulling broader financial markets down as well, after the package delivery company’s chief executive, Raj Subramaniam, said he expected a “worldwide recession.”

Central banks, meanwhile, are engaged in the most aggressive campaign of rate increases since the late 1990s, according to Citigroup. This month, central banks in Europe, Canada, Australia and Chile have hiked rates, and the Fed 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 are misreading the global economy in their rush to raise rates, just as they did — in the opposite way — last year when they insisted inflation would prove temporary and resisted acting. The cumulative effects of multiple countries tightening credit at the same time could strangle global growth.

“I don’t really get the sense that many or any central banks are paying huge attention to how their policies are affecting the rest of the world,” said Maurice Obstfeld of the University of California at Berkeley, the former chief economist of the International Monetary Fund.

The Fed’s rate hikes are driving the dollar up against other major currencies, which makes imported goods less expensive for Americans, while making it harder for people and businesses in other countries to afford products made outside their borders.

Major oil importers such as Tunisia have been especially hard hit, since crude is priced in dollars. The stronger greenback also hurts developing nations that have large dollar debts. As their local currencies lose value against the dollar, it takes more Turkish lira or Argentine pesos to make debt payments.

Despite raising its benchmark lending rate by two-and-a-half points since March, the Fed has been unable to slow the economy enough to take the pressure off prices. On Thursday, initial jobless claims fell for the fifth straight week, in the latest sign that the labor market remains too hot for the central bank’s comfort.

Though strong hiring is good news for American workers, many economists have said that unemployment will need to increase before inflation cools.

The Labor Department’s report this week that consumer prices in August were 8.3 percent higher than one year ago — little changed from 8.5 percent in July — disappointed investors.

Some analysts expect the Fed to keep hiking beyond the 3.8 percent level that policymakers suggested in June would complete their anti-inflation work. On Friday, economists at Deutsche Bank said the Fed’s benchmark lending rate could hit 5 percent next year — roughly twice the current level.

Wall Street firms such as Oxford Economics this week said the Fed will hit the brakes hard enough to corral prices even if it sends the United States into a brief downturn.

“Higher-for-longer inflation, more aggressive Fed monetary policy tightening and negative spillover effects from a weakening global backdrop will combine to push the U.S. economy into a mild recession,” the firm said in a note to clients.

Washington Post

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