A World Where Inflation Hits Consumers and Risks of a Recession Rise

LONDON—The global economy is increasingly at risk of slipping into recession, a survey showed on Tuesday showed central banks are aggressively tightening policy when they need help, while consumers That’s because they’re holding back on spending in the face of the highest inflation of a generation.

And supply chains, which have yet to recover from the coronavirus pandemic, have been further hit by the war in Ukraine and China’s stringent COVID-19 lockdown, hurting manufacturing.

A countless survey of purchasing managers from Asia to Europe to the United States, released Tuesday, showed business activity was contracting, pointing to little prospect of an immediate turnaround.

“Simply put, it’s the very high rate of inflation that forces households to pay more for the goods and services they have to buy, and it’s the other items. means less spending on

“It’s a decline in economic output, which is what’s causing the recession. Rising interest rates play a small role, but it’s really an increase in inflation.”

US private sector business activity contracted for the second month in a row in August and was the weakest in 18 months, notably the softening recorded in the services sector.

A 45% U.S. recession within a year and 50% within two years is likely, according to economists surveyed by Reuters on Monday.

There was a similar story in the Eurozone, but the cost-of-living crisis saw customers put their hands out of their pockets and business activity across the block contracted for two months.

The pessimistic data has pegged the euro to a 20-year low against the dollar, adding to the disastrous rise in gas prices that have dragged Europe into recession.

Private sector growth slowed in the UK, outside the European Union, as factory output fell and the larger service sector saw only modest expansion.

Growth at Japanese factories slowed to a 19-month low this month as the decline in output and new orders deepened while Australia’s composite purchasing manager’s index fell below the 50 mark that separates growth from contraction.

feel a pinch

Inflation has reached multi-decade highs in many parts of the world, forcing central banks to tighten monetary policy as their mandate is to maintain price stability.

Traders at work on the floor of the New York Stock Exchange (NYSE) in New York City on August 22, 2022. (Brendan McDermid/Reuters)

The U.S. Federal Reserve will raise its benchmark overnight rate by 2.25 percentage points this year in a bid to curb decades-high inflation, and is expected to raise it again next month, according to a Reuters poll. It was revealed.

However, despite its aggressive policy, inflation is likely to remain above the Fed’s target this year and next year and beyond.

The Bank of Canada surprised markets last month with a better-than-expected 100 basis point hike in key interest rates, saying more were needed.

After years of struggling to deliver meaningful inflation, the European Central Bank is now well ahead of target, starting its rate hike cycle in July and pushing interest rates higher than expected. raised. .

The Bank of England was one of the first banks in its industry to raise borrowing costs, and the energy bill is expected to push consumer price inflation to over 13%, pushing the country into a prolonged recession. It is widely expected to continue to do so, despite warnings that it will face October.

Central bank heavyweights, including Federal Reserve Chairman Jerome Powell, gathered this week for their annual symposium in Jackson Hole, Wyoming, to discuss just how big future rate hikes could be. , which could reveal how strong the economy is.

Richard Flynn of Charles Schwab said: “Investors may expect the Fed, ECB, and BoE to halt rate hikes in the first half of 2023, following signs that the central banks that led the tightening will halt rate hikes. I can’t,” he said.

“This year’s symposium may provide an early indication of when the transition from rate hikes to rate cuts will occur.”

Jonathan Cable