By Mike Dolan
LONDON- One of the worst starts to a year in decades might lead you to think investors are already braced for an economic storm ahead, but it’s far from clear recession risks have been taken on board or are fully priced.
Reasons for this year’s 15-20 percent slide in benchmark stock indices are well documented – rising interest rates to rein in soaring post-pandemic inflation rates that have been exaggerated by a Ukraine-related energy and food price shock that has also pummelled household incomes and corporate margins.
Throw in heightened geopolitical risks more generally, China’s growth-sapping “zero COVID” lockdowns, persistent supply-chain problems and chip shortages – and skies darken further. And while a Northern summer might alleviate the immediate energy pressure, there’s little clarity in Europe about what happens coming next winter if Russian gas supplies are cut off.
No great surprise then that economists are warning of a global recession ahead even as many parts of the world appeared to be just surfing the crest of a post-pandemic reopening wave.
The main policy debate hinges on whether the US Federal Reserve and other central banks will feel the need to tighten monetary policy to “restrictive” territory that deliberately slows economies to drag inflation back down – or whether growth will roll over before they even need to consider getting above so called “neutral” rates still 150 basis points up from here.
Either way, it’s not a great picture of activity ahead.
Just this week World Bank President David Malpass feared the worst for global output. “It’s hard right now to see how we avoid a recession,” he said on Wednesday.
Washington’s Institute for International Finance halved its world growth forecast to just 2.3 percent for this year and said “global recession risk is elevated”.
