Topics Global economy | Inflation

Sajjid Chinoy  Last Updated at August 2, 2022 22:02 IST

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The global outlook is looking increasingly stagflationary in the near term. An unrelenting array of adverse supply shocks — from manufacturing supply chains to commodity and labour markets — have simultaneously caused activity to slow and prices to rage around the world. The US has already registered two quarters of negative growth, and while this may not be characterised as a recession just as yet, given the strength of the labour market, the writing is clearly on the wall, particularly in Europe hit by a new natural gas shock. What’s more worrying is the Fed will have to keep hiking into a slowdown, to tame still-elevated inflation pressures. Commodity prices, despite their recent correction, are still almost 25 per cent higher than at the start of 2022 but more importantly, developed market labour markets are the tightest in decades, engendering the real prospect of a wage-price spiral. Markets therefore expect another 100 bps of Fed hikes this year — on the back of the 225 bps already delivered — and for the ECB to move another 50 bps in September. But slowing growth, elevated inflation and tighter monetary conditions are not the only challenges. The US dollar has strengthened almost 11 per cent this year, putting significant pressure on emerging market currencies. And there’s unlikely to be any relief on this front. The dollar has typically strengthened in global recessions, especially if the Fed is unable to cut rates anytime soon.

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