The global growth outlook continues to deteriorate, and concern about global recession mount with rising pressure in the global economy. In the US, stubbornly high inflation has kept the Federal Reserve on the defensive. The market now expects the Fed to raise the federal funds rate by at least another 200 basis points, inclusive of the 75 bps expected this week.
US growth forecasts continue to lose steam after the economy registered two quarters of economic reversals. Higher US rates imply higher rates elsewhere. Arguably, the US economy could use higher rates, but most other economies are not strong enough to digest tighter monetary policy. However, the stronger US dollar will push these hikes out to the rest of the world.
Europe is adjusting to an extreme spike in energy prices and potential energy rationing after Russia cut gas supplies to the continent in retaliation for Nato’s support of Ukraine. Economists see a bleak winter for the region. On the two-quarters-of-negative-growth definition of recession Germany appears to already be in it. The eurozone is forecast to see negative growth in the last quarter of this year and the first of next year. In the meantime, the European Central Bank, though late, is hiking rates at an unprecedented pace. Economists are still revising forecast lower, so it is not clear that the current view captures how awful the coming economic slowdown for Europe will eventually be.
In the meantime, Chinese authorities are struggling to stabilise a deflating property sector, which is estimated to account for anything from 20% to 30% of economic activity. Developers are under pressure as credit-fuelled business models collapse and liquidity dries up. The Chinese authorities remain wedded to their zero Covid strategy, which has left it the only notable economy still imposing lockdowns, at great cost to consumer confidence and expenditure. Low rates of vaccinations with effective mRNA vaccines in that economy could leave the zero Covid playbook in place for a while longer. China is forecast to grow 3.5% this year, a far cry from its 5.5% growth target.
In emerging markets an increasing number of economies are at risk of, or in, debt distress. Countries accumulated large stocks of debt pre-Covid. Multilateral support helped stop them from unravelling during the crisis. However, the combination of unsustainable debt levels and tightening financial conditions is proving toxic in the post Covid era. According to the IMF, 30% of emerging economies and 60% of low-income countries are now in or at risk of debt distress. There is a risk that debt distress, which has at times come in waves, could prove systemic. This would undermine investment flows to and growth in emerging economies.
In Africa south of the Sahara growth engines are sputtering. The big economies in the region are beset by problems, both externally imposed and of their own making. Zambia has defaulted on its debt, and it is expected that Ghana will also go into a debt restructuring process soon. Countries in debt distress cannot grow. Kenya’s finances are fragile. Nigeria is failing to produce oil and missing out on the high oil price. SA is mired in its umpteenth episode of ever more frequent bouts of intense load-shedding.
The World Bank published a policy note highlighting the increasing risk of a global recession. The authors point out that growth will struggle to maintain momentum in the face of a synchronised global withdrawal of pro-growth policy measures, and advise that policymakers should “stand ready to manage the potential spillovers.” The note, written in the dry bureaucratic tones typical of such institutions, fails to mask the panic.
With every developed economy inflation release, central bank hiking decision, Chinese Covid lockdown and sovereign default, among others, the possibility that policymakers could engineer an elegant soft landing for the global economy on this very narrow possibility strip appears more remote. I for one would not bet on it.
• Lijane works in fixed-income sales and strategy at Absa Corporate & Investment Banking.
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