THE STAR – 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.
“We’re living through a period of elevated risk,” former United States (US) Treasury Secretary Lawrence Summers told Wall Street Week with David Westin on 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 Federal Reserve (Fed) 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.
In the past several days, Nike Inc reported a surging stockpile of unsold product, FedEx Corp 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.
Apple Inc is backing off plans to boost output of its new iPhones, Bloomberg reported. The turn is coming even before the full thrust of monetary tightening is felt.
The Fed and many counterparts are pledging to keep going with steep rate hikes as they attempt to rebuild credibility.
Quantitative tightening programmes, where central banks remove liquidity by shrinking bond portfolios, are also just getting going. Inflation data showcase the need for, as Fed vice-chairman 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 eurozone 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.
A rapidly appreciating dollar, supercharged by the Fed, may help cool US inflation, but it drives it up elsewhere by weakening other currencies – pressuring 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 pandemic were hardly apparent a year ago.
But Europe’s Russian-induced energy crisis, and China’s deepening property slump and continued zero-Covid approach weren’t part of the consensus outlook.
Not all is dark, with US job-market resilience a notable feature. But the plans by Facebook parent Meta Platforms Inc for the first reduction in headcount ever illustrate how that may still change.
And Britain’s experience in recent days showcases how investors are in a mood to punish policymakers pursuing approaches deemed unsustainable.