Economy

Global economy is in recession; central banks are unchained

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© Stocksak. FILE PHOTO – The City of London financial district can still be seen in London, Britain on March 9, 2020. REUTERS/Henry Nicholls

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By Hari Kishan

BENGALURU, (Stocksak). The global economy is heading towards a recession. Stocksak polled economists to find that they have cut growth forecasts in key economies. Meanwhile, central banks are raising interest rates to keep inflation low.

One bright spot is the fact that major economies are either already in a recession, or are about to enter one, and have relatively low unemployment rates compared to previous downturns. According to the latest poll, the gap between joblessness and growth rates will be the smallest in at least four decades.

While this may reduce the severity of recessions, most respondents agree that it will be brief and shallow in key economies. However, it could also keep inflation higher for longer periods than most people expect.

The majority of global central banks are more than two-thirds of their way to the expected final interest rate. However, with inflation still much higher that their mandates, there is a risk that those rate expectations are too low.

Global central banks have spent the majority of this year frontloading rate increases to catch up after being late to call the inflation issue. Most economists and central bankers agree that there will be little work next year.

Michael Every, global strategist at Rabobank said that “risk of a worldwide recession” is the topic everyone’s talking and has become a mainstay in forecasts. “I think this is a no-brainer if you look at all the trends in the key economies.”

The low jobless rate is problematic.

(Graphic: Stocksak Poll – Economic outlook of major economies https://fingfx.thomsonreuters.com/gfx/polling/zjpqjqerkvx/Stocksak%20Poll%20-%20Economic%20outlook%20of%20major%20economies.png)

Only six central banks were polled by this time and only six were expected meet their inflation targets by the end next year. This was a decline from July surveys where two-thirds were expected hit their respective targets by then.

Analysts Deutsche Bank (ETR) wrote “…history does not repeat itself. However, because inflation forecasting has been so bad over the past 18 months, we should ask what happens when inflation exceeds thresholds. It’s usually quite sticky, which is why it’s so common.

Global equity and bond markets are in turmoil, while the U.S. dollar has reached a multi-decade high in foreign exchange markets that are based on U.S. rates expectations.

Strong 70% of economists (179 of 257) said that there was little to no chance of unemployment rising sharply in the next year. This shows how widespread forecasters’ belief that it won’t be a severe recession.

According to Stocksak polls, global growth is expected to slow to 2.3% by 2023, down from 2.9% this year. Then, it will rebound to 3.0% by 2024, according the economists who surveyed 47 key economies between Sept. 26 and Oct. 25, 2018.

These were all downgrades based on polls taken in July.

173 economists out of 242 said that the cost-of-living crisis in the countries they cover would worsen within the next six months. The remaining 64 predicted it would improve.

The inflation cycle is global in character, made worse by an abrupt surge in energy prices following Russia’s invasion of Ukraine on February 24, but much will depend on how high the U.S. Federal Reserve will push rates higher.

The Fed will likely go for a fourth consecutive 75 base point interest rate hike on Nov. 2. Economists say it shouldn’t pause until inflation reaches around half its current level.

China, the second-largest economy in the world, was expected to grow 3.2% by 2022. This is far below the 5.5% target and well below pre-pandemic growth rates.

That would be the worst performance since 1976 if you exclude the 2.2% growth after the initial COVID-19 hit in 2019.

India’s economy was also forecasted to grow at a much slower pace over the next two-years, with medians showing 6.9% growth for the 2022-23 fiscal years and 6.1% next.

The eurozone economy was expected to grow 3.0% in 2018, but stagnate in 2023 and expand 1.5% in 2024.

(For more stories from the Stocksak global economy poll:

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