The US central bank has been signaling from early 2022 that it will be launching a rate hike campaign to combat inflation. The inflation rate currently remains high in the US
In a recent statement, Fed Chairman Jerome Powell said the Fedwill back interest rate increases until prices start falling back toward a healthy level. “If that involves moving past broadly understood levels of neutral we won’t hesitate to do that,” the central bank leader said. The concern is whether the Fed’s attempts to tame inflation will lead to a recession. Historically, eight of the 11 rate hiking campaigns by the Fed ended up in recession. Both China, the world’s second largest economy and the European Union are facing slowdowns in the economy. These issues that are faced by countries that serve as the locomotive of global growth might present issues with exports and growth in emerging markets.
Covid lackdown contracting Chinese economy
China, which has a zero tolerance approach to the outbreak of the Omicron variant of Covid-19, is experiencing an economic downturn due to recent lockdowns; and this is also paving the grounds for a downward trend in the economies of neighboring economies in the region. Lockdowns being implemented in China are causing contraction in the country’s overall economy and in the industry. Experts express concern that the contraction could be worse off than the shrinkage the country experienced early on at the start of the pandemic.
The country’s growth target of 5,5 percent is not realistic, experts say, and predict that China will grow at a rate of 4 to 5 percent for the next few consecutive years.
ECB might increase rates in July
High inflation and the war in Ukraine have pushed fears of a recession risk into the background, politicians say. Observers say that the European Central Bank (ECB) will likely increase rates in July for the first time in 11 years. ECB President Christine Lagarde in a recent statement said that the central bank could increase rates after ending net asset purchases, under the pandemic emergency purchase programme (PEPP), which already came to an end in the first quarter of this year. She spoke in favor of a gradual normalization policy after the first rate hike. Financial markets expect the ECB to increase rates by 50 basis points in July and September.
Emerging global food crisis
As central banks around the world are taking steps to fight persistent and high inflation, the continuation of the war in Ukraine is causing food prices to climb. United Nations Secretary-General António Guterres warned of “the specter of a global food shortage in the coming months” without urgent international action. The poor particularly in developing countries are at higher risk. Millions of tons of grain are blocked at Ukraine’s ports due to Russia’s invasion.
The World Bank in May announced it plans to take action as part of a comprehensive, global response to the ongoing food security crisis, with up to $30 billion financing in existing and new projects. The bank said that the financing in areas such as agriculture, nutrition, social protection, water and irrigation will be available for implementation to address food insecurity over the next 15 months. The World Bank said it was working with countries on the preparation of $12 billion of new projects.
Ordinary residents suffer due to high inflation
Food retailers and ordinary residents are increasing their stockpiles in anticipation of an upward surge in prices to hedge against inflation. With the war in Ukraine triggering higher food and energy prices; the lockdowns in China disrupting supply chains and central banks adopting rate hike policies, the overall outlook remains negative. Due to these financial markets and higher risk assets such as tech stocks and crypto currencies are registering losses. All of these developments are further fueling fears of a stagnation in the economy.
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