The global economy is in the grips of a serious slowdown, with some key economies at high risk of recession and only sparse meaningful cooling in inflation over the next year, according to source polls of economists.
Most central banks are only part-way through a still-urgent cycle of interest rate rises as many policymakers make up for a collective error in judgment last year thinking supply chain-related inflation pressures would not last.
That carries with it another risk – central banks moving too quickly without taking time to assess damage from the fastest interest rate rises in more than a generation following over a decade of near-zero rates. Despite their aggressive response in some cases, the most in several decades inflation have yet to ease in most of the near-50 economies covered in the June 27-July 25 surveys of more than 500 forecasters around the world.
The U.S. Federal Reserve, due to hike rates by another 75 basis points later on Wednesday, is a case in point. Inflation there, currently at a four-decade high of 9.1%, is not expected to cool to the Fed’s 2% target until at least 2024.
Soaring inflation has turned into a serious cost of living crisis in much of the world, pushing up recession risks. There is already a median 40% chance of recession happening in the world’s largest economy in the coming year, up sharply from three months ago, and those changes have risen for the eurozone and Britain too.
Emerging economy central banks covered by the polls are further through their expected hiking cycle, about three-quarters of the way, on average. This is skewed higher in part by the early and aggressive rate campaign by Brazil’s central bank, one of the first out of the gates.
Developed ones, by contrast, are only on average about halfway through, held back in part by the European Central Bank, which only just began raising rates. That means more rate rises still lie ahead.
We are particularly concerned about two developments. First, is the shift to aggressive hikes at many central banks. This is an inevitable outcome of moving late. However, it greatly increases the risk of overkill, as there is no time to reassess the impact of the hikes, noted Ethan Harris, global economist at Bank of America Securities.
Second, we worry about feedback effects across regions. In particular, recessions in the U.S. tend to impact global confidence and growth even more than warranted by the size of the U.S. economy. Stay tuned.
