No global recession yet but prepare for stagflation, economists say

A global recession is not imminent, but prepare for rising costs and slowing growth, economists say.

“There will be no sudden ‘after’ of stagflation,” said Simon Baptist, chief global economist at the Economist Intelligence Unit, referring to a surprise recession after a period of stagflation.

As the war in Ukraine and pandemic disruptions continue to wreak havoc on supply chains, stagflation – marked by low growth and high inflation – will persist “for at least the next 12 months”, Baptist told CNBC last week.

“Commodity prices will start falling from the next quarter, but will remain permanently higher than before the war in Ukraine for the simple reason that Russian supplies of many products will be permanently reduced,” he added. .

The pandemic as well as the war in Ukraine has stifled the supply of commodities and goods and disrupted efficient distribution through global supply chains, driving up prices of daily consumer goods such as fuel and food .

But, while rising prices will hurt households, growth in many parts of the world, albeit slow, continues to turn and labor markets have not collapsed.

Unemployment levels in many economies have fallen to their lowest level in decades.

For almost all Asian economies, a recession is quite unlikely, if we are talking about successive periods of negative GDP.

Simon Baptist

Global Chief Economist, EIU

So consumers – although wary of a repeat of the last global recession caused by the subprime mortgage crisis in the United States more than 10 years ago – need not start preparing for a recession.

“For almost all economies in Asia, a recession is quite unlikely, if we’re talking about successive periods of negative GDP,” Baptist told CNBC Street Signs on Thursday.

Even though the global economy is at risk of a recession, many consumers have significant savings and have stocked up on durable household goods, the economist said.

“So to some extent it won’t be as bad as the immediate numbers seem,” he said.

AMP Capital’s chief economist, Shane Oliver, doesn’t see recession written on the wall either, at least not for another 18 months.

“Yield curves or the gap between long-term bond yields and short-term rates have yet to decisively invert or warn of recession and even if they do now the average leads to recession is 18 months,” he said in a note.

He believes that a strong bear market can be avoided in the United States and Australia.

At the same time, central banks around the world are tightening interest rates to fight inflation.

The U.S. central bank announced its biggest rate hike in more than 22 years earlier this month, raising its benchmark interest rate by half a percentage point and warning of further rate hikes .

Federal Reserve minutes released Wednesday indicated that officials were ready to go ahead with several 50 basis point interest rate hikes as they try to bring inflation down.

Aerial view of containers stacked at the Port of Los Angeles on January 19, 2022 in San Pedro, California.

Qian Weizhong | CGV | Getty Images

Last week, the Reserve Bank of New Zealand, which tightened more than other central banks, raised its benchmark rate another half a percentage point to 2%. It was the central bank fifth rate hike in a row and signaled that the spot rate would peak higher than expected.

The rate is now up 1.75 percentage points since the tightening cycle began in October.

“We are very determined to get actual inflation back to our target range of 1-3% and at 6.9% we are well beyond that…we are resolute in our determination to contain the inflation,” Governor Adrian Orr said. .

But there is always a risk that controlling inflation could induce a recession, economists say.

Stagflation is notoriously difficult to control, because controlling high prices by raising interest rates could lead to even weaker growth.

“The longer inflation stays high, the more fear investment markets have that central banks won’t be able to tame it without causing a recession. Inflation at 2% ‘will include hardship,'” Oliver said.

But not everyone is affected.

Capital Economics senior economic adviser Vicky Redwood said she was confident central banks would be able to reduce inflation without causing a recession.

Planned rate hikes in many places – such as Europe, the UK and the US – should be enough to bring inflation back to target, Redwood said.

“[But] if inflation expectations and inflation prove more tenacious than expected, and interest rates are yet to rise accordingly, then a recession will most likely be on the cards,” she said in a statement. note.

A Volcker shock-style recession might even be warranted, she added.

The Volcker shock happened when Fed Chairman Paul Volcker raised interest rates to the highest level in history in the 1980s, in an effort to end double-digit inflation in the USA.

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