Sunday June 26, 2022

World’s economic outlook turns grim

Lee joins a growing list of global policymakers, market participants, economists and companies warning of recession risks against the backdrop of Russia’s invasion of Ukraine and COVID-19 shutdowns in China

By News Desk
May 06, 2022
Lee Hsien Loong. Photo: Screengrab of a Youtube video
Lee Hsien Loong. Photo: Screengrab of a Youtube video

KARACHI: Singapore Prime Minister Lee Hsien Loong has warned the world may face a recession within the next two years.

According to international media reports, Lee joins a growing list of global policymakers, market participants, economists and companies warning of recession risks against the backdrop of Russia’s invasion of Ukraine and COVID-19 shutdowns in China.

His statement comes a few days after Germany’s Deutsche Bank economists warned of deep US recession next year. The bank’s economists warned the US Federal Reserve is likely to need to engage in the most aggressive monetary tightening since the 1980s to tamp down an inflation rate at a four-decade high, which will lead to a deep US recession next year.

The Bank had raised eyebrows earlier in April by becoming the first major bank to forecast a US recession, albeit a "mild" one. "We will get a major recession," Deutsche Bank economists wrote in its latest report to clients.

The problem, according to the bank, is that while inflation may be peaking, it will take a "long time" before it gets back down to the Fed's goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.

"We regard highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel," Deutsche Bank economists wrote in its report with the ominous title, "Why the coming recession will be worse than expected."

Consumer prices spiked by 8.5% in March, the fastest pace in 40 years. The jobs market remains on fire, with Moody's Analytics projecting that the unemployment rate will soon fall to the lowest level since the early 1950s.

Given that the job market has "over-tightened" by as much as two percentage points of unemployment, the bank said, "Something stronger than a mild recession will be needed to do the job."

The good news is that Deutsche Bank sees the economy rebounding by mid-2024 as the Fed reverses course in its inflation fight. Of course, no one knows precisely how this will play out. Although Deutsche Bank is pessimistic — it's the most bearish among major banks on Wall Street — others contend this gloom-and-doom is overdone.

Goldman Sachs concedes it will be "very challenging" to bring down high inflation and wage growth, but stresses that a recession is "not inevitable." "We do not need a recession but probably do need growth to slow to a somewhat below-potential pace, a path that raises recession risk," Goldman Sachs economists wrote in a report.

UBS is similarly hopeful that the economic expansion will continue despite the Fed's shift to inflation-fighting mode. "Inflation should ease from current levels, and we do not expect a recession from rising interest rates," Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a report on Monday.

Deutsche Bank said the most important factor behind its more negative view is the likelihood that inflation will remain "persistently elevated for longer than generally anticipated."

The bank said several developments will contribute to higher-than-feared inflation, including: the reversal of globalization, climate change, further supply-chain disruptions caused by the war in Ukraine and Covid lockdowns in China and coming increases to inflation expectations that will support actual inflation.

"The scourge of inflation has returned and is here to stay," Deutsche Bank said. If inflation does stay elevated, the Fed will be forced to consider more dramatic interest rate hikes. The Fed raised interest rates by a quarter-percentage point in March and Chairman Jerome Powell conceded last week that a half-point hike is "on the table" at next week's meeting.

Across the Atlantic, the UK is facing a coalition of awfulness. It’s got a super-hot labour market, like the US does, and runaway energy prices, like Europe. The result? High inflation and stagnant growth.

The IMF projections for 2023 predict that the UK will have the highest inflation out of the G7 nations, and the lowest growth

The source of Germany’s problems lies to the east — in Russia. Putin has halted flows of gas into Poland and Bulgaria. Very soon, Germany is going to face a dilemma: Either pay for gas on Putin’s terms, or go cold turkey. A recession would be brutal. A quarter of Germany’s energy comes from imported natural gas — two-thirds of which was supplied by Russia in 2020. At the end of the first quarter, Germany had cut down Russian imports to just 40% of its natural gas mix, and is aiming to reduce it further by the end of the year (if Putin doesn’t get there first!). But that still means that if Russia switched off the gas valve, Germany would need to find a source to replace about 10% of its total energy mix.