By: ADMIN |
2023-03-10 00:19:53
After a near-decade of ultra-low rates, The US fed delivered us a whopping 375 basis points rise in rates in less than a year. The shock is having an effect. The fact that a recession is coming is now widely accepted. Researches conducted by leading global banks have shed some light on the extent of the upcoming slowdown. Barclays, Bank-Of-America Merryl Lunch and BNP Paribas expect US economy to contract by 0.1-0.4% while China’s growth will slow down to 4.5 to 5.5%. US inflation is expected to ease to around 5% mark, down from 8% average of this year. This will trigger rate cuts by end of 2023. Morgan Stanley sees the Fed taking the benchmark rate to 4.375%, Barclays sees the rate between 4.25% and 4.50%. BofA sees the rate between 2.75% and 3.00% by the end of 2024.
The economist Mohamed El-Erian, one of the best Fed and markets watchers alive, hasn’t liked what he’s seen for some time now. There’s a tendency to see economic challenges as “temporary and quickly reversible,” El-Erian wrote in a commentary for Foreign Affairs, citing the Federal Reserve’s initial thought that high inflation would be transitory or the consensus that a recession could be short. “The world isn’t just teetering on the brink of another recession,” he continued. “It is in the midst of a profound economic and financial shift.” He referenced economic theory that a recession occurs when a business cycle reaches its natural endpoint and before the next cycle really takes flight, but he said this time won’t be one more turn of the “economic wheel,” as he sees the world experiencing major changes that “will outlast the current business cycle.” He highlighted three trends that suggest a transformation in the global economy is under way.
The first transformational trend, El-Erian says, is the shift from insufficient demand to insufficient supply. The second is the end of boundless liquidity from central banks. And the third is the growing fragility of financial markets. The first shift was driven by the effects of the pandemic, beginning with the entire system coming to a halt and stimulus from the government, or what El-Erian called “enormous handouts,” causing “demand surges well ahead of supply.” But as time went on, El-Erian said, it became clear that the issue of supply “stemmed from more than just the pandemic.” It’s tied to Russia’s invasion of Ukraine that resulted in sanctions and geopolitical tensions, along with a widespread labor shortage brought forward by the pandemic. These disruptions in supply chains gave way to “nearshoring,” a more permanent shift of companies moving their production closer to home, rather than a reconstruction of the 2019-era supply chain. This essentially reflects a change in the “nature of globalization.”
“Making matters worse, these changes in the global economic landscape come at the same time that central banks are fundamentally altering their approach,” El-Erian said. As inflation soared, the Fed pivoted to aggressive rate hikes. But this fundamental change in approach led to the third problem, ElErian writes. “Markets recognized that the Fed was scrambling to make up for lost time and started worrying that it would keep rates higher for longer than would be good for the economy. The result was financial market volatility.” This created financial fragility. El-Erian explains “The fragility of the financial system also complicates the job of central banks,” he said. “Instead of facing their normal dilemma— how to reduce inflation without harming economic growth and employment—the Fed now faces a trilemma: how to reduce inflation, protect growth and jobs, and ensure financial stability.”
El-Erian concluded “these changes mean economic outcomes will be harder to predict”. And it won’t necessarily mean one simple outcome but rather a reflection of a “cascading effect”—in that one bad event could likely lead to another.
