Global financial leaders should prepare for multiple inflationary shocks, the head of the International Monetary Fund warned, as fears of a global economic slowdown continue to hit markets around the world.
IMF Managing Director Kristalina Georgieva said central banks are finding it increasingly difficult to bring down inflation without triggering recessions.
Speaking on the sidelines of a meeting of G7 finance ministers and central bank governors in Germany, Georgieva pointed to the increasing pressure on energy and food prices from Russia’s war in Ukraine, supply chain disruption and cost pressures from China’s zero-Covid policy.
“I think what we need to be more comfortable with is that this may not have been the final shock,” Georgieva said, adding that the outbreak of the Omicron variant coronavirus late last year showed that the inflation was not “temporary.” “ would be time shock.
Inflation this year has risen to its highest level in about 40 years in both the UK and US and is the highest in the euro zone since statistics began in 1997.
Investors fear that central banks risk a “hard landing” and push economies into recession if they hike interest rates to bring inflation down to target levels.
The London stock market plunged into the red on Thursday, with the FTSE 100 index falling 146 points, or 2%, to 7,292 in afternoon trade.
The pan-European Stoxx 600 index fell 1.3%, with personal care companies, food and beverage companies, technology stocks and retailers all lagging.
Wall Street opened lower, a day after its worst sell-off in nearly two years, as major retailers reported rising inflation was weighing on consumer spending and eating into their profit margins.
US department store chain Kohl’s cut its earnings and sales outlook, repeating Target and Walmart earlier this week.
US jobless claims rose for the third straight week, with 218,000 Americans filing for unemployment benefits last week. A survey of Philadelphia-area manufacturers showed that growth almost stalled this month as rising costs hit factories.
“The reality is, no matter which direction your turn takes, there are warning signs flashing,” said Fiona Cincotta, senior financial markets analyst at City Index.
Inflation also weighed on confidence in UK factories, where investment plans remained weak according to the CBI’s latest reports on industrial trends. The number of manufacturers planning to raise their own prices remained near a record high.
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Federal Reserve Chairman Jerome Powell has indicated that the Federal Reserve will hike interest rates by 50 basis points in June and July in a bid to bring US inflation down from 8.3% in April. That has fueled fears of a global slowdown.
Joost van Leenders, senior investment strategist at wealth manager Van Lanschot Kempen, warned that the Fed is typically unable to pull off a soft landing.
“A recession is usually necessary to suppress inflation. However, the likelihood of a soft landing is slightly greater when there are no major imbalances in the economy, particularly when families and businesses are not running short of funding. And by the way, this is exactly the situation we are in right now. A positive result is therefore possible, although the Fed has its hands full,” said Van Leenders.
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