International Monetary Fund and World Bank expect global slowdown
The International Monetary Fund (IMF) said it expected a slowdown in the third quarter.the World Bank also said that the global economy might be inching toward a recession as central banks aggressively tackle sticky inflation.
“The World Bank highlighted that because the new tightening polices are synchronised across a number of countries,” Sophie LundYates, lead equity analyst at Hargreaves Lansdown, wrote in a note.
“The effects of these interest rates could be compounded and magnified, leading to a steeper-than-expected slowdown in global growth.”
All eyes are now on the US Federal Reserve, which is expected to deliver its third 75-basispoint hike of the year ater raising by 225 basis points so far in 2022.
European shares slid 1.6 per cent on Friday as recession warnings from two major global financial institutions and bets of a large interest rate hike from the US Federal Reserve next week knocked sentiment.
The declines sent the continent-wide STOXX 600 to its worst week in three months, down 2.9 per cent.
Except real estate stocks, all major sectoral indexes were in negative territory, with industrials, healthcare and financials dragging the most.
Delivery and logistics firms tumbled ater US peer Fedex Corp on Thursday withdrew its financial forecast, fanning fears of a global demand slowdown.
Shares of Deutsche Post, Kuehne & Nagel, DSV Panalpina and Royal Mail Plc slumped between 4 per cent and 8 per cent.
Ailing German gas importer Uniper SE fell 1.7 per cent as it struggled to keep up with costs ater the sudden halt of a major natural gas pipeline by Russia earlier in the month.
The STOXX 600 has shed 1.7 per cent in September so far, heading for its second straight monthly decline, as investors fret over soaring prices and an energy crisis in the region.
UK’S FTSE 100 index fell 0.6 per cent ater data showed retail sales fell much more than expected in August, in another sign that the British economy is sliding into recession. But the exporter-heavy index fell the least across Europe as the pound weakened.
As the European Central Bank (ECB) raises interest rates to control inflation, a key debate is whether it can stop at a so-called ‘neutral’ level or whether it would still need to cool the economy even though it is heading towards recession.
While “neutral” has become a sort of buzzword for policymakers and ECB watchers, it is a cryptic concept and its precise level is elusive, threatening to confuse an already complex debate.
The neutral rate is one that neither stimulates nor slows growth, bringing the overall economy’s output into line with its potential while stabilising inflation.
There is one glitch: it’s “unobservable”, which is central bank speak for nobody really knows its exact level. There are countless estimates but it is essentially a theoretical rate and only known ater the fact, potentially years later.
What is certain is that the neutral has been on a downward trend for decades, mostly because of the eurozone’s weak potential growth rate, the ageing of its population and low productivity improvements.
Few policymakers will put a number on it but two of them recently ventured public guesses and even raised their estimates, puting the neutral well above the current 0.75 per cent deposit rate.
French central bank chief Francois Villeroy de Galhau now puts the rate at below or close to 2 per cent versus his previous estimate for 1 per cent to 2 per cent. Greek central bank chief Yannis Stournaras meanwhile lited his estimate to “around 1.5 per cent, or even 2 per cent” from between 0.5 per cent to 1.5 per cent.
Market economists also tend to put it in the 1.5 per cent to 2 per cent range, making it one of the lowest neutral rates among major economies.
Societe Generale sees the ECB’S neutral at 1.5 per cent, albeit “with low conviction,” while puting this rate at 2.15 per cent in the United States, 2.5 per cent in the UK and 1.75 per cent in Switzerland. At 1 per cent, Japan’s rate is the lowest.
Another complication is that the economic upheaval of the past three years, from the pandemic to supply shortages and Russia’s war in Ukraine, pull the neutral rate in opposing directions, making it even less predictable.
Deutsche Bank argues that the energy shock may lower the bloc’s growth potential and thus creates a drag on the neutral rate.
“On the other, higher energy investment needs and a weaker current account suggest a change in the investment-saving balance that may push (the neutral rate) higher,” it said in a note.
As the ECB raises interest rates to control inflation, a key debate is whether it can stop at a so-called ‘neutral’ level or whether it would still need to cool the economy even though it is heading towards recession