Navigating a near perfect storm

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,Why so? With inflation running at a four-decade high in the United States and the eurozone and central banks on an aggressive rate hike path, economic data points are beginning to show the weakening global economy with talk of recession dominating most discussions.

AS global markets ended the first half on a relatively sour note, market strategists and economists are now busy plotting their respective market views for the second half of this year as we head towards a near-perfect storm.

Why so? With inflation running at a four-decade high in the United States and the eurozone and central banks on an aggressive rate hike path, economic data points are beginning to show the weakening global economy with talk of recession dominating most discussions.

Some have placed bets that the US will enter a recession next year while the International Monetary Fund (IMF) believes the United States will just narrowly avoid recession this year and in 2023.

The IMF itself will be releasing the revised gross domestic product (GDP) growth data for the year and 2023 later this month while the World Bank had lowered its 2022 projection to just 2.9% from 4.1% it predicted in late January this year, while growth for 2023 is now estimated at 3% against 3.2% six months ago.

The lowered projection comes on the back of the protracted Russian invasion of Ukraine, the lockdown of several cities in China to contain the new wave of Covid-19 outbreak, supply chain disruptions as well as the strong dollar, which by and large is driven by the US Federal Reserve (Fed) rate hike expectations.

The question on everyone’s mind is whether we are in for a soft landing scenario, as what is being desired by the Fed, or a hard landing as the global economy is now going through some dark clouds midway through the 2022 flight path.

The turbulence we are riding on now can be devastating if we are not able to manoeuvre the near-perfect storm ahead of us.

Focus on supply constraints

While the Fed is dead serious in raising rates to bring down inflationary pressure and pulling away liquidity via its quantitative tightening measure, one wonders if that is the right policy, especially at a time when inflation pressure itself is caused by cost-push factors.

Higher commodity prices, logistical issues as well as economic disruptions caused by war or lockdowns due to covid-19 measures taken by certain governments are supply-driven constraints pushing production costs higher globally.

Sky-high commodity prices have also pushed other raw material prices to the roof, resulting in a higher cost of goods for finished products.

Hence, raising interest rates is not the solution to tackle inflationary pressure as it does not help to bring manufacturers’ costs down.

On the contrary, a higher borrowing cost will disrupt businesses and increase the cost of doing business, which in the end will push finished product prices even higher.