From Anjan Roy:
There are now signs that talk of an impending recession in the global economy is on the decline. Eventually, a global recession could be avoided, but not an immediate return to skyrocketing growth rates.
The financial markets are now gaining momentum. But the real economy would come into play. It looks like the key is still how the Russian invasion of Ukraine would go. Will energy markets return to sustainable levels? Oil market reports are now pointing to a move towards stability. The prices no longer jump. Hopefully the new year will show some positive trends.
A CHRISTMAS PARTY has begun, at least on the global equity markets. The financial markets are showing surprising momentum and are reaching new heights. Indian stock markets jumped higher. The representative BSE index rose nearly 1,000 points to reach an all-time high of 62,412. The NSE index is also rising in tandem, suggesting a broader recovery in markets. The immediate trigger for global financial markets to shake off lethargy and respond with vigour, is positive feedback from the US Federal Reserve on the global economic outlook and inflation trajectory. Behind this, however, lies a major struggle among economists over their perceptions of the course of the general price level and its nature. The world had become accustomed to low inflation rates and efforts to raise prices. For decades, Japan had faced negative inflation (or deflation) and falling prices that had devastated its economy. However, prices suddenly started to rise, and quite alarmingly in the last two years. So much so that inflation in the United States hit a 40-year high earlier this year, setting alarm bells ringing. Everyone started shouting about the need for anti-inflation measures. Woe don’t come alone. The threat of inflation was compounded by the threat of a global recession.
As China eased restrictions across the country, its economy slowed. China, the second largest economy and a massive importer of commodities from around the world, played a crucial role in setting the pace of the global economy. Not to be spared, the Russian invasion of Ukraine and the resulting crackdown on world energy markets had begun to stall the world economy. Russia is a major supplier of several essential commodities, namely energy (oil and gas), food (wheat) and fertilizer (phosphate). So does Ukraine, which is a major wheat exporter. The invasion and war were reflected in higher food and energy prices around the world. The shortage of supplies of energy products from Russia pushed up energy prices overall. Higher energy prices have placed Europeans under severe pressure on their disposable income. Third world countries faced food shortages, energy was another second blow.
Added to this was the fear that the global economy could shrink. In fact, major economies hot on the heels of the pandemic shrank rather than expanded. Hence, these were the ideal recipe for a global slowdown and recession. Everyone had adjusted to whether the current wave of inflation had become endemic or temporary. Some eminent economists had argued that inflation was becoming structural and would require intractable intervention to control it. This has indeed meant large doses of rate hikes – that’s the economist’s textbook medicine. Others argued that inflation is temporary and needs to be treated with caution. The Fed had approached inflation control with the earlier view, ie large increases in inflation and price control. This would automatically have brought about a recession.
The latest revelations from the Fed’s Monetary Policy Committee point to a rethink on the fight against inflation. This also points to a possible shift in perceptions of a recession in the global economy in the immediate future. There are now signs that talk of an impending recession in the global economy is on the decline. Eventually, a global recession could be avoided, but not an immediate return to skyrocketing growth rates. When the Federal Reserve of United States released its latest monetary policy consultation procedure, it was interpreted as indicating that future rate hikes would be paired. The Fed may not hike rates in the short term. This is a win for those economists who have argued that the recent surge in headline prices was a temporary phenomenon and that the rise in prices should level off shortly. That is, the inflation was temporary and not one that took root. Former US Treasury Secretary Lawrence Summers of Harvard University had championed the embedded inflation stance and therefore advocated anti-inflationary measures including sharp interest rate hikes. Earlier this year, the Fed raised its key interest rate by a historic 75 basis points in one fell swoop.
A slowdown in interest rate increases is good news for equity markets, demand and investment. In anticipation of rate hikes, investors shifted their funds away from equity investments and into bonds or debt. As a result, bond yields rose and stocks lost ground. With a reversal in viewpoints, a reversal in investment trends is expected. The global financial markets are effectively dominated by American financial institutions. They move huge amounts of money across the markets. Instead of taking their funds from third world emerging markets, these institutional investors are taking their investable funds while keeping an eye on US interest rates. Institutions are moving away from US markets and back into emerging markets given a lower interest rate outlook in the US. Therefore, we see dollar exchange rates falling and other currencies rising. The Indian rupee had improved over the past few days as had Indian financial markets.
The billion dollar question now is: Is this reversal in perception real and lasting? Is the interest rate cycle now turning and will interest rates remain stable, at least for the time being? Will prices stabilize? This will give an indication of the beginning of a recession. The financial markets are now gaining momentum. But the real economy would come into play. It looks like the key is still how the Russian invasion of Ukraine would go. Will energy markets return to sustainable levels? Oil market reports are now pointing to a move towards stability. The prices no longer jump. Hopefully the new year will show some positive trends. (IPA)
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