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Fear of inflation and slow growth spread around the world

The economies of China and Europe have shown signs of slowing down, while the US is getting closer and closer to recession amid rising global inflation.

Asian stock markets fell in the red on May 19, as global inflation began to weigh on corporate profits, raising concerns about the possibility of inflation and slow growth (stagflation). Japan’s Nikkei 225 index fell more than 500 points, or 1.9%. South Korea’s Kospi and Hong Kong’s Hang Seng fell 1.3% and 3.5%, respectively.

This development followed the sharp decline of the US stock market on May 18, after retailers announced dismal business results. The Dow Jones Industrial Average fell more than 1,164 points, or 3.6%. Nasdaq also fell more than 4%. Shares of retail giant Target fell as much as 25% – the most since 1987.

“Asian stocks are following the decline of major US retailers such as Target and Walmart. These are examples of the impact of input inflation and shrinking profit margins,” said Justin Tang, head of the department. Asia Studies at United First Partners – review.

In Southeast Asia, Thailand’s SET and Singapore’s Straits Times also fell in the morning but recovered in the afternoon. Consumer price indexes are also rising in Asian economies, affecting investor sentiment going forward.

Tang said inflationary trends affecting retailer profits will spread in Asia, “as global supply chains have not yet recovered from Covid-related impacts and hostilities in Ukraine”.





The information board of the Nikkei 225 index on May 19 at one point dropped more than 700 points.  Photo: Nikkei

The information board of the Nikkei 225 index on May 19 at one point dropped more than 700 points. Photo: Nikkei

On May 18, US Treasury Secretary Janet Yellen also warned about the turmoil of the global economy. “The global economic outlook is challenging and uncertain. Rising food and energy prices are causing inflation to slow growth, in particular, reducing output, spending and increasing inflation around the world. world,” Yellen said in Bonn (Germany), before a meeting of G7 leaders.

She pointed out that inflation, especially with food and energy costs, is becoming a long-term concern and will be the dominant theme of global leaders going forward. A day earlier, Fed Chairman Jerome Powell warned that raising interest rates in the US to cool down inflation would cause some difficulties.

Wells Fargo & Co CEO Charlie Scharf even said that the US’s move to a recession was “no doubt”. “We’re going to be hard-pressed to avoid some kind of recession,” he said on May 17.

Earlier this week, former Fed Chairman Ben Bernanke also mentioned the possibility of inflation with slow growth. According to him, even in an optimistic scenario, the economy will slow down. “Inflation is still very high, but it will slow down. So in the next year or two, growth will be low, unemployment will rise a bit and inflation will remain high,” he forecast.

Fears of accelerating inflation in recent days due to new pressures may continue to lift oil and food prices. The European Union this week launched plan to end dependence on Russian energy within five years.

Rising food prices – linked to the crisis in Ukraine, a major agricultural producer – are causing shortages in many developing countries. The UK government on May 19 said the country’s April inflation hit a 40-year high of 9%. This figure is even higher than the US, with 8.3%.

Meanwhile, economists have downgraded their global growth forecasts for this year as China and Europe show signs of slowing down. Earlier this week, China announced consumer spending and output decline in April due to blockade measures.

Last month, the International Monetary Fund (IMF) forecast world economic growth of 3.6% this year, down from 6.1% last year. This forecast is also 0.8% lower than the level made in January. The Bank of England also warned earlier this month that the country is likely to enter a recession.

The big reason for the gloomy global outlook is the signal from the Fed and the European Central Bank (ECB) about the ability to tackle inflation strongly. The Fed last month was interest rate hike added 0.5% – the largest since 2000 – and is planning to increase it further this year.

ECB President Christine Lagarde said she would support a rate hike in July. If implemented, it would be the first time the ECB raised rates in more than a decade. Higher interest rates mean that borrowing costs – buying a home, auto, business expansion and other items – will increase. This can force consumers and companies to cut spending and investment, slowing the economy.

Even if a global recession is avoided, many people may still feel like they are in it, according to economists. As the cost of living grows faster than wages, consumers’ hard-earned money is increasingly depreciating.

Americans have amassed decent savings during the pandemic, as much of their spending has dropped and money has been given to them by the government. That is now reversed. According to the US Department of Commerce, the savings rate in March fell to a nine-year low. Households are increasingly looking to credit cards and savings to spend. The debt of Americans increased rapidly after a period of stagnation because of the pandemic. As interest rates rise, the monthly payments on that debt will continue to eat away at their pockets.

For now, the fundamentals of the US economy are solid. More and more people are getting jobs and returning to old habits like traveling, eating out and going to concerts. According to the US Department of Commerce, retail sales have increased for the first four months of the year.

However, the risk of a recession has increased in recent weeks. Several other problems also arise. For example, supply chains were disrupted by the blockade in China and the war in Ukraine. These causes are beyond the ability of central banks to address.

Diane Swonk, chief economist at consulting firm Grant Thornton, said the risk is that if inflation persists, consumers will reduce spending. Businesses will also reduce hiring to maintain profit margins.

Inflation will eat away at living standards, especially with the current three basic needs of food, shelter, and energy. “That kind of inflation is a huge threat to the economy,” Swonk said. Therefore, it is becoming a new obsession of the world, next to the pandemic and geopolitical conflicts in Europe.

Session An (according to Nikkei, WSJ)

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