Global markets remained shaky due to growing concerns about a global economic slowdown. The economic activity continues to slow across advanced economies including the major economies like the USA and Europe is likely on the brink of a recession due to the war-induced energy crisis.
Recently United Nations (UN) projected that global GDP will slow down to 2.2 per cent by next year and the World Trade Organization (WTO) has also significantly lowered its forecast for world trade growth for 2023, to 1.0% against 3.4%.
During the last weeks we saw that the global stock markets slightly rebounded after reaching their fresh year lows but retreated after the Fed and ECB policymakers insisted, they would aggressively tighten policy to fight inflation.
An economic slowdown can be caused because of various reasons. Here’s a closer look at 4 factors that cause the global economic slowdown.
Russia’s invasion of Ukraine
Russia’s war in Ukraine has led to a European energy crisis and manufacturing was slowing in the Eurozone since February when the conflict in Ukraine started. European countries are heavy dependence on Russia for its Energy requirements and Russia has already reduced natural gas supplies to 13 EU member nations as European governments bolster their support for Ukraine. Now Europe is struggling to contain an Energy crisis that could lead to a deep economic recession. Gas prices have recently hit record levels in Europe and record gasoline prices pushed global inflation to a new high.
Inflation has reached multi-decade highs in many parts of the world. High prices of food and energy have been the main drivers of inflation. The unprecedented rise in retail inflation numbers over the last few months has left many in the government worried. US inflation has reached a 40-year high this year and in Germany, inflation is at its highest level in more than a quarter century. Higher inflation prompted the major central banks to increase interest rates which led to a slowdown in economic activities.
Aggressive monetary tightening in major countries
Soaring inflation forces central banks to tighten monetary policy as their mandate is to maintain price stability. The U.S. Federal Reserve raised interest rates by 0.75% for the third consecutive time in the September meeting. ECB raised rates by a bigger-than-expected 75 basis points in September and signaled further hikes should be delivered in coming months. Markets are now pricing in a 75-bps rate hike at the next Fed and ECB meeting next month. High-interest rates can cause a recession. Higher interest rates increase the cost of borrowing, reduce disposable income, and therefore limit the growth in consumer spending.
Extreme lockdowns in China
The other possible reason could be the impact of extended lockdowns in China. The world’s second-largest economy is in trouble and the slowdown has been worse than anticipated due to its property slump and zero-COVID strategy. Sales in the housing market dropped by 30% year on year in the first eight months of 2022. Chinese economic slowdown will have an adverse effect on global economic growth.
There is a lot of skepticism among investors about aggressive interest rate hikes across the globe to stave off decades-high inflation and also stoke fears of a global recession. However, the recession can be imminent if inflation starts to come down. So, watch closely the upcoming inflation reports. US will announce on Thursday (October 13) its consumer price index (CPI) for September, which measures the change in the prices of goods and services. The inflation data could determine the size of the US Federal Reserve’s rate hike at next month’s policy meeting.