High inflation darkens global economic outlook

Policy makers around the world see rising risks that the global economic slowdown could turn into a steeper slump due to strong inflation, high energy costs and climbing interest rates.

Another bad U.S. inflation report last week is likely to keep the Federal Reserve lifting interest rates at a rapid clip. That could help spur the U.S. dollar higher, further elevating the cost of imports and debt service for many countries. Key energy producers are crimping supply, feeding price pressures and slowing economic activity, particularly in Europe. New data from China showed consumer spending falling sharply, another sign of cooling economic growth.

“The worst is yet to come," said International Monetary Fund Managing Director Kristalina Georgieva at a Thursday briefing, as finance officials gathered in Washington for meetings hosted by the IMF and the World Bank. “Across many economies, recession risks are rising."

Economies representing more than a third of global output will contract next year, while the world’s three largest economies—the U.S., the European Union and China—will essentially stall, the IMF forecasts. Overall, the fund projects 2.7% growth in 2023, down from 3.2% this year.

“The situation is worse than during Covid-19," Mohamed Maait, the Egyptian finance minister, said Wednesday on a panel hosted by the Center for Global Development.

Many of the policy makers at the meetings see high U.S. inflation and the Fed’s response as a central threat to their own economic prospects.

The U.S. consumer-price index rose 8.2% in September from a year earlier, with core prices—which exclude volatile food and energy prices—rising 6.6%. That was the fastest rate in four decades, a sign of strong underlying price pressures.

The core-CPI reading likely keeps the Fed on track to raise its benchmark interest rate by 0.75 percentage point next month. The report heightens the risk officials will delay a slowdown in rate increases.

The Fed’s rapid rate increases this year have helped draw investors into U.S. markets and pushed up the value of the dollar. A stronger greenback increases the costs of dollar-denominated imports and debt service for many other countries. It also puts pressure on other central banks to raise their own interest rates to protect their currencies, possibly further slowing growth.

“All of us would like to know what will be the Fed reaction in the coming months because the strength of the dollar keeps the pressure on our currencies," Barnabás Virág, deputy governor of Hungary’s central bank, said Monday at an event sponsored by the Institute of International Finance.

The U.S. economy has shown signs of resilience this year. The labor market is cooling but remains healthy. U.S. retail spending was unchanged in September from August and up 8.2% from a year earlier, the Commerce Department said Friday.

The IMF forecasts the U.S. economy to expand 1% next year, down from 1.6% this year. Economists polled by The Wall Street Journal put the probability of a U.S. recession in the next 12 months at 63%, up from 49% in July’s survey.

The U.S. economy’s momentum worries other countries because it gives the Fed latitude to raise interest rates even more, Sri Mulyani Indrawati, the finance minister of Indonesia, said in an interview.

A weakening global economy, high interest rates and a strong dollar “really can hurt all countries in the world," Mrs. Sri Mulyani said.

“A global recession is very possible," she said.

Russia’s war in Ukraine weighs on the world economy. It has hampered exports of critical food and fertilizers from the countries, endangering 345 million people, the IMF said. Russia has throttled back natural-gas supplies to Europe, sending manufacturers there reeling and pushing many economies there to the brink of recession.

“Europe faces particularly serious strains because of what’s happening to energy prices there," Treasury Secretary Janet Yellen said during a news conference Friday. Many emerging-market countries “face a host of significant problems," she added.

Meanwhile, the Organization of the Petroleum Exporting Countries and its Russia-led allies recently announced a major production cut, which raised oil prices. The International Energy Agency warned Thursday the decision could be a tipping point for the global economy to enter a recession.

There is no official definition of a global recession, but many economists say one essential element is economic growth falling below population growth, or roughly 1.1%. The World Bank forecasts global growth of 1.9% next year.

“That’s dangerously close to a world recession," said David Malpass, World Bank Group president.

Another risk to the global economy is the danger that rapidly rising interest rates will trigger financial-system disorder, the IMF warned in a report last week.

A U.K. tax-cut plan aimed at stimulating growth triggered a major bond selloff last month that forced the Bank of England to step in to stabilize the financial system. The U.K. government reversed key parts of the plan Friday, partly because of the market reaction.

Economic policy makers around the world are monitoring stresses in financial markets, knowing from history that climbing interest rates can cause threats to financial stability from unexpected sources.

Lending from the Fed’s so-called discount window for emergency loans ticked up in recent weeks, to $7.67 billion as of Wednesday, the highest level since June 2020. The Fed also lent $6.5 billion to two foreign central banks last week, part of standing arrangements to extend dollars and relieve pressures in dollar-funding markets.

“The thing I’m mindful of is we’re dealing with an economy that is readjusting to an extraordinary shock," said Kansas City Fed President Esther George in a webinar hosted by S&P Global Ratings on Friday.

“Moving too fast can disrupt financial markets and the economy in a way that could ultimately be self-defeating," she said.

The persistent uncertainty in the economic and financial outlook could soon start to weigh on how businesses make hiring decisions, John Waldron, Goldman Sachs Group Inc.’s president, said Friday, speaking at the IIF conference. He said firms could consider hiring fewer people “and maybe making some layoffs."

In China, strict Covid-19 lockdown policies have curbed its economic growth, particularly during the second quarter of 2022. China’s overextended property sector is slowing rapidly. China’s slump is expected to add to hiccups in global supply chains and curb global trade.

All the risks to growth could be particularly painful for middle- and low-income countries. Roughly 60% of the world’s poorest nations are in or at risk of debt stress—unable to meet their financial obligations—and many are struggling with higher costs of imported food and energy, according to the IMF.

“The sense that one gets from the meetings is that uncertainty is so high, it’s difficult to see light at the end of the tunnel," José de Lima Massano, governor of the National Bank of Angola, said in an interview.

Source: LiveMint