Global economics: growth slowing as challenges mount
Building geopolitical tensions, supply chain woes reigniting, rising inflation and higher interest rates mean the global economy is set to slow this year and a ‘soft landing’ looks shaky.
3 minutes to read
Last updated: 01 August 2022
The first half of 2022 has seen considerable economic challenges. The humanitarian crisis in Ukraine has been joined by new strict Covid-19 restrictions across Chinese mainland cities and poor harvests in many major agricultural markets – all this is supercharging supply disruption and price rises globally.
Globally, inflation is forecast by some to reach 6.6% and 9.5% in advanced and emerging economies respectively in 2022 before halving in 2023. The US inflation rate hit 9.1% in June with it climbing 8.9% across the Euro zone in July. Pressure has been mounting in many nations with food and fuel price inflation some of the main contributors, yet some early indicators may point to an easing in other areas and oil currently sits below $100.
Rates rising gathering pace
Coordinated global monetary tightening is being employed to try and address pricing pressures and the pace is accelerating but could it start to slow? The Federal Reserve has implemented back-to-back 75bps hikes in June and July and another is slated for September, however with economic conditions looking gloomier they may take a pause for breath as to avoid a ‘hard landing’.
The action is being replicated around the world. The European Central Bank joined a raft of others by implementing their first rate rise in over a decade and ended their negative rates, rising the target by 50bps to 0%. There are more rate hikes to come but the pace will start to slow in latter months
Whilst economies slow and the R word becomes common place
The so called economic ‘soft landing’ is looking less likely. The US economy shrunk in the first and second quarter of 2022. Whilst that has triggered more mummering’s of a recession, using the widely used definition, only the NBER can declare if its so and at the moment it is sticking to a slowdown not recession due to the strength in the jobs market.
Equity markets are increasingly betting on the rate rising pace slowing and the US S&P 500 recorded the best month since November 2020 rising by 9% – yet still remains more than 10% down on the year
The eurozone economy surprised with growth in the second quarter of 0.7% compared to the first – although this varied across the bloc with Germany’s economy flat whilst Spain and Italy grew by 1%. Europe’s largest economy is grappling with many factors, not least energy supply. Nord Stream resumed flow after a maintenance period but at a much-reduced capacity. There is still a great deal of uncertainty which is already weighing on sentiment and could weigh on the bloc in the second half of the year. Early indications of what's to come may be seen in Germany’s record breaking drop in retail sales in June.
Has the dollar peaked?
Given the Federal Reserve’s aggressive hikes and a backdrop of heightened uncertainty the dollar has strengthened. Parity with the euro was briefly touched in mid-July and the pound to hit lows of $1.18. These have both since come off and if the Fed slows the pace of hiking some of the strength could come off the boil in the later months of 2022 and into early 2023. But for now, Dollar denominated buyers and those with currencies linked to the dollar have seen relative buying power increase and this isn’t likely to materially change in the short term.
On balance, the consensus for global growth in 2022 is around 3%, although this varies widely. It's clear that rates will rise and we are already seeing many economies in slowdown mode – not necessarily recession though. Whilst many recessions only become clear in hindsight one of the biggest threats is sentiment and continued downbeat rhetoric – a self-fulfilling prophecy? Perhaps, for now the only certainty is more uncertainty.
Read more or get in contact: Flora Harley, residential research
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