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Fears allayed of rampant inflation, aggressive monetary policy stifling growth this year

WALL Street is entering a bear market due to grappling with the impact of rising interest rates, high inflation and energy costs, the war in Ukraine and a slowdown in China’s economy. Photo, Reuters.

WALL Street is entering a bear market due to grappling with the impact of rising interest rates, high inflation and energy costs, the war in Ukraine and a slowdown in China’s economy. Photo, Reuters.

Published Jun 19, 2022

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Economists have allayed fears that the runaway global inflation and aggressive monetary policy from major central banks could halt the economic recovery and trigger a recession, at least not this year.

This comes as the US Federal Reserve, the largest central bank in the world, responded this week by raising interest rates by 0.75 percent to 1.75 percent a year –the biggest interest rates hike in the US in 28 years – in a bid to curb inflation.

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Inflation in the US accelerated to 8.6 percent in May, the highest in 41 years, and is expected to accelerate to surpass 10 percent this year, pushed higher by soaring energy and food costs.

The US stock market tumbled this week on market volatility.

Wall Street is entering a bear market due to grappling with the impact of rising interest rates, high inflation and energy costs, the war in Ukraine and a slowdown in China’s economy.

The European Central Bank also called an unscheduled emergency meeting this week to discuss the current market conditions, and the sell-off in government debt markets.

The Bank of England is expected to raise its main rate by 25 basis points to 1.25 percent during its June meeting, in its fifth consecutive rates hike and pushing borrowing costs to the highest in 13 years.

In South Africa, the SA Reserve Bank (Sarb) is also expected to deliver a second consecutive 50 basis points to 5.25 percent next month, as inflation remains stubbornly high at 5.9 percent and could rise further.

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Policy normalisation by major central banks and higher yields have tightened global financial conditions.

Anchor Capital co-chief investment officer, Nolan Wapenaar, pointed to a combination of ingredients that led to a perfect storm for global inflation.

Wapenaar said the Covid-19 stimulus, global lockdowns, supply chain blockages, the commodity super cycle, reverse globalisation, the Russian war, and slowing US immigration all had a part to play in sparking inflation.

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“The odds of a recession are clearly increasing. However, we think it is unlikely to be this year,” Wapenaar said.

“Our concern is that the global economy may indeed suffer a recession in the second half of 2023. At this stage, it is probably a 50/50 call that we will see a shallow recession.

“This really depends on how stubborn inflation is and how aggressively the US Fed’s actions are. Our view is that inflation will come under control, without the Fed needing to crash their economy.”

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The International Monetary Fund (IMF) has projected the global economy to grow by 3.6 percent in 2022, but this forecast is being revised downwards because of the impact of the sanctions on Russia.

The Sarb’s forecast for global growth in 2022 was also revised down from the March meeting to 3.5 percent from 3.7 percent, while domestic growth is expected to slow to 1.7 percent from 2.0 percent.

Many countries which rely heavily on Russian food and energy imports are concerned about their economies sliding into a recession, after Russia was slapped with economic sanctions.

The sanctions have disrupted global supply chains and sent prices of energy and food skyrocketing, leading to an increase in inflation worldwide, particularly in the US and Europe.

Oxford Economics director of global macro research, Ben May, said the global economy had entered a late cycle as growth was high and experiencing a slowdown, but not a recession as yet.

Oxford Economics forecasts global growth to slow to 3.1 percent this year, from a high of 5.9 percent in 2021.

May said inflation would slow by itself and central banks would not have to engineer a recession to achieve this.

“Certainly, the risk of a recession has grown over time and there is plenty of potential shocks out there that could push the global economy into a lower trajectory.

“But we are still of the view that the idea of a recession is more likely than not to occur over the course of the next 12 months.

“But we certainly feel that perhaps the weight attached to a recession is a little too high, and there is still a fairly decent chance that economies around the world can engineer a softer landing,” May said.

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