There are growing concerns that the UK, the US and Europe could move into recession this year or next, as the rising cost of living constrains consumer spending.
The World Bank this week cut its 2022 global growth outlook to 3.2% from 4.1% and is expected to be followed by similar cuts from the IMF later today.
IMF managing director Kristalina Georgieva has already revealed that the growth outlook for 2022 and 2023 for 143 countries has been downgraded around the world, reflecting higher prices for food and energy caused by Russia's invasion of Ukraine.
Global growth optimism among fund managers plunged to an all-time low in April, according to Bank of America (NYSE:BAC)’s latest survey, while a global recession is now identified by money managers as the ‘biggest tail risk’.
Inflation that is at 40-year highs in the US and 30-year highs in the UK and is proving more persistent than anticipated, is leading to central banks being moved to tighten policy, raising interest rates and reversing the quantitative easing that has characterised monetary policy since the 2008 financial crisis.
Despite the hopes of the Bank of England, Federal Reserve and European Central Bank for a ‘soft landing’ from these tightening efforts, financial markets are seeing this as increasingly implausible due to policymakers seeing the need for aggressive rate hikes.
US Fed policymaker James Bullard this week spoke of a possible need for a 75-basis point hike.
The last time the Fed hiked rates 0.75% was November 1994, which analysts at Rabobank noted was “the final blow in the Great Bond Massacre and the trigger for the Mexican Peso Crisis, which snowballed to the Asian Crisis of 1997-98 and the Russian Crisis of 1998. Before that, a 75bp hike was seen in February 1989 – and in October 1989 we got a stock market crash and a recession in 1990.”
As for the UK, economists at ING forecast that gross domestic product will go into reverse in the second quarter, contracting 0.3%, but said “the jury’s out on whether that evolves into a technical recession”, which would require a subsequent fall in GDP in the third quarter.
Households are having to spend more on energy so spending on non-essentials is expected to fall, ING said, as seen with the dropping of streaming subscriptions in the past month.
“With the growth backdrop deteriorating, we expect the Bank of England to pause its tightening cycle by the summer,” ING said in a note last week.