LONDON- After months focusing on central banks’ response to raging inflation, financial markets are being jolted into the realization that a global economic downturn may now loom.
Sentiment dampeners include the Ukraine war, huge rises in energy and metals prices, aggressive central bank policy tightening led by the US Federal Reserve, and China’s policy of locking down cities to ward off COVID.
The International Monetary Fund and World Bank fanned growth fears further last week when they cut 2022 global forecasts by nearly a full percentage point.
Financial analysts too are increasingly pessimistic, with Deutsche Bank seeing an “outright” US recession by end-2023.
Omens are flying in thick and fast.
They include warnings this week from shipping groups Maersk and Kuehne& Nagel about falling container volumes, and parcel service UPS predicting e-commerce growth to cool.
Deutsche Bank, reporting earnings on Wednesday, flagged credit losses could rise “significantly”.
On the data front, US new home sales hitting two-year lows, weakening British and German consumer sentiment and new factory orders all point to slowing growth momentum.
Investors have reacted by pushing bond yields off recent multi-year highs, driving down oil prices from 14-year peaks and dumping currencies such as the Australian dollar and Brazilian real that had, until recently, surfed the commodity boom.
“The market likes to try and look to the next big thing,” said Craig Inches, head of rates at Royal London Asset Management. “For the last few months, it has been focused purely on inflation but now it’s starting to focus on recession.”
Inches is not in the recession camp, but reckons central banks’ determination to go faster with rate rises “has made people think, well, what does that mean for future growth concerns? Does that mean we are moving towards a harder landing?”
Still, with global inflation at multi-decade highs, the tensions with growth may play out over months, forcing investors and policymakers alike to walk the thin line between the two.
Morgan Stanley strategist Mike Wilson outlines a ‘fire and ice’ scenario, where the Federal Reserve tightens policy into an economic slowdown. – Reuters
