Global growth forecasts for the near term are on the anvil and will be unveiled in the second week of October next, during the the annual joint IMF and World Bank meetings. But there are already plenty of concerns expressed by various authorities about the anemic growth around the world as majority of economies are still lagging behind pre-pandemic growth rates. America is the only major economy that has recovered the growth rate of pre-pandemic period. But China, the second largest economy in the world, is four percentage points below pre-pandemic growth trends. The European Union (EU) is down two percentage points behind the benchmark growth rate while the composite global growth is estimated around two per cent.
At a critical juncture like the present one it behooves to look at how the major economies are navigating the shoals and eddies in the economy. With inflation soaring high the Federal Reserve Bank (Fed) reversed its easy money policy and embarked on monetary tightening ,raising the basic policy rate from zero a year ago to 5.50 per cent at present, through quarterly increases of 0.25 per cent over the last one year period. Having brought down inflation in the territory of 3.0 per cent from 9.0 a year ago, the Fed has decided to hold the line taking a pause. But even before this decision, jobs and inflation figures were bright enough to suggest that the United States (US) economy was successfully withstanding the Fed’s relentless drive of rate rise. There was optimism that Fed might not need to do more to get inflation back to the targeted 2.0 per cent . Over the last few months the main narrative on American economy has centred on a soft landing where the Fed succeeds in taming inflation without pushing unemployment higher, in a reversal of the Philip’s Curve (high interest, high unemployment level). It was indisputable that the US economy had evaded the much dreaded recession and stock markets have soared higher, defying prognosis of a decline. Up until now equities in stock markets and corporate bonds supported by excess liquidity performed well enough to indicate that the rate rises did not affect the economy, real or financial. But the sceptics remained convinced that the damages from rate rises were bound to appear.
Truly enough, the chickens have come to roost even before the euphoria is over. August marked the first monthly drop in stock prices in America, showing benchmark S& P 500 index sliding down. The opening days of September have seen similar weak performance in the stock markets. What has happened? For one, the sudden rise in oil price, following cut in supply by Russia and Saudi Arabia, has upended the calm in the market. The benchmark oil price has suddenly climbed by a quarter, up at $ 90 per barrel, rekindling jitters about inflation rising. The analysts are trying to spot how and when growth and inflation under leash will give way to economic downturn. The second reason is because of higher interest rate than one year before the yield curve of bonds has risen compared to return on stocks. It is a narrative —driven market and it is no surprise that the story investors are telling themselves in the wake of the latest oil shock has shifted from the old one.
Ominously, the shock is already evident in Europe where stocks are facing stagnation and euro has been plunging lower against US dollar. European equities stumbled after the Fed signalled that it probably had at least one more rate hike on the cards after its historically rapid run-up link rates over the last 18 months. The impact of rate hikes by European Central Bank (ECB) was felt much more in EU countries than in America, overburdened as they are (except Germany) with sovereign debt. The exposure to greater volume of short term bank loans has further exacerbated the crisis. Given this backdrop, a spike in European gas prices in recent weeks brings a sense of deja vu. Eurozone inflation has fallen from a peak of 10.6 per cent to 6.1 per cent and new data is expected to show a further decline. But the ECB is likely to focus on core inflation which is slated to rise from current 5.3 per cent in the near future.Given this scenario, rate rise in interest is likely to continue, bringing it to 4.5 per cent or even higher.
The current economic situation in Germany, the economic powerhouse in Europe, has been anything but robust because of slack in exports. The index measuring the current economic situation in the country fell farther in August than was expected, down to -71.3 from -59.5 the month before. Unless the German economy picks up, the eurozone economy cannot expect to ride on its back for quick recovery to normal.
Year -on -year core inflation in the UK is 6.8 per cent at present, the highest in the G7, while GDP shrank by 0.5 per cent in August. Sterling, which has been on the slide since July, was down at $1.23 after softer- than- expected UK inflation data in the third week of September. Analysts think a final Bank of England (BoE) rate hike is the most likely outcome after the recent jump in global oil prices.
Russia, which has become an outlier in the economy after the Ukraine war, is a test case of how an economy smarting under a raft of economic sanctions can navigate the financial turmoil caused by external interferences. The country’s economic policy makers are reportedly struggling to balance the competing demands of growing the economy and steering it through western sanctions while keeping stable. They do not have much leeway to manoeuvre in the global financial milieu and support the rouble after western countries froze about $300 billion of the country’s last year, leaving the central bank unable to boost the r by selling dollars and euros. In August, Russia’s central bank raised its key interest rate 3.5 per cent taking it to 12 per cent. Rouble strengthened immediately after the large rate rise which exceeded the market expectations.
In Asia, broad index of Asia- Pacific shares outside Japan slumped 1.6 per cent while Japan’s Nikkei stock index fared only slightly better with a 1.4 per cent loss. In tandem with this, Japan’s 10- year government bonds yield rose to its highest in a decade. Though the move signals an expectation that it could finally move away from its easy money yield curve control policy, it was also tracking US 10- year Treasury bills yields which had risen to 4.4 per cent in the wake of Fed rate hike.
China, the world’s second largest economy, appears to be struggling to regain its pre-pandemic growth momentum but is hobbled by both domestic and external factors. High tariff and quantitative restrictions by America have adversely impacted the economy while over-leveraged housing sector has created domestic financial crisis. The country’s major state- owned banks have in recent weeks sold US dollars to buy yuan in both onshore and offshore markets. This has become a new normal to slow the pace of yuan depreciation. The recent steepening in the yuan’s decline is a result of China’s widening yield differential with the US and investors’ mounting concerns over China’s weak economic growth and rising default risks in its property and shadow banking sectors.
Pointing the finger at China, International Monetary Fund (IMF) plans to tell its policymakers to boost weak domestic consumption, address its troubled real estate sector and rein in local government debt, problems it thinks are dragging down both Chinese and global economic growth. In a forthcoming IMF ‘ Article lV’ review of China’s economic policies the Fund is going to urge Beijing to shift its growth model away from debt-fuelled infrastructure investment and real estate. While China’s economic policies may not be all full proof, it alone cannot be held accountable for the global financial instability and growing indebtedness. America’s policy of reverse easy money raising interest rate, subsidising domestic industries and imposing quantitative restrictions on exports of some countries have affected global growth by creating instability and distorting global investment pattern. Keeping interest rate high when inflation has steadily climbed down may be also be a sly ploy to wage currency war in the interest of promoting strategic interests of the country. It is high time that IMF became even handed in identifying defaults in policy making by member countries irrespective of their ideological or political orientation.
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