The global rout in stock markets, cryptocurrencies and other risky assets has gathered pace amid growing concern that out-of-control inflation, rising interest rates and slowing growth could combine to tip the world into recession.
Share prices fell in Asia on Friday at the beginning of what was likely to be another torrid day for investors spooked by the US Federal Reserve’s decision this week to raise interest rates by the largest margin for almost 30 years.
Other leading central banks such as the Bank of England and the Swiss National Bank have followed suit – the latter in its first hike for 15 years – sending economists scrambling to revise their forecast for growth downwards.
Stephen Innes at SPI Asset Management in Hong Kong said: “No central bankers worth their weight would put inflation-fighting credentials on the line and import higher energy inflation via a weaker currency.
Despite the Bank of Japan announcing on Friday that it was sticking to its ultra-loose monetary policy, he added the rate rises eleswhere were a “highly ominous signal for stock market investors… the global race to hike rates is nowhere near the finishing line”.
Many believe that the United States may be in recession by next year, raising the prospect of a wider global slump.
Shares in the world’s biggest economy have suffered their worst start to a year for 60 years with the S&P 500 benchmark index down 23% since January after losing another 3.25% on Thursday. Analysts at JP Morgan said the state of the S&P 500 “implies an 85% chance of a US recession”.
The falls – mirrored on the Dow Jones average, the tech-heavy Nasdaq and UK and European markets – did nothing to boost confidence in Asia Pacific. The Nikkei in Tokyo was off 1.6% and was on track for its worst week of losses for two years, as was the Indian Nifty index. In Sydney, the ASX200 was down 1.8% on Friday afternoon.
The cryptocurrency rout also shows no sign of abating with bitcoin down 7.8% and ethereum 8.45% worse off. In addition, the Financial Times reported that the Singapore-based crypto hedge fund Three Arrows Capital – which has $10bn under management – failed to meet margin calls this week amid the slide in crypto values.
The outlook is worsened by the likelihood of the conflict in Ukraine dragging on and the west’s economic war on Russia leading to even higher energy prices ahead of the northern hemisphere winter.
“The speed and degree of policy tightening may prove too much for economies to handle, particularly given the commodity price shock currently in play,” economists at NAB bank in Australia said in a note on Friday. “As a result, recession risk for several of the major advanced economies, including the US, is uncomfortably high.”
David Bassanese, chief economist of Betashares in Sydney, went further and predicted a US recession “within the next 12 months” due to persistent inflation and the Fed’s pledge to raise rates until the inflation genie is back in the bottle.
As a result, he said that share markets in the US had further to fall. “There seems scope for equity markets to fall further. My base case is the ultimate peak-to-trough decline in the S&P 500 will be 35%, implying a decline to 3,100 from its closing peak of 4,796 on 3 January.” It closed at 3,667 points on Thursday.
The ongoing coronavirus lockdowns in China are causing further problems for the global economy. Supply chain snarl-ups in the world’s second largest economy that started during the pandemic are predicted to continue into next year at least thanks to the shutdown of Shanghai and other key regions.
The bigger picture is that China was already facing problems ranging from the decoupling from the west amid geopolitical tensions, a faltering, hugely indebted property market, and the uncertainty caused by president Xi Jinping’s crackdown on large tech companies.
As the west increases rates, China’s central bank has been cutting them and the government in Beijing has been throwing more stimulus at the economy, although it may not be enough to refloat the global economy as its massive $4tn stimulus did after the global financial crisis of 2008-09.
The Bank of England’s decision to raise rates by 0.25% on Thursday was criticised by some as too little too late to stop inflation in its tracks. One forecast says prices will be rising by 11% by October and another report said food price rises could top 15% in the autumn.
The British economy shrank by 0.3% in May, according to figures released on Monday, and after a 0.1% decline it “increased” the chances that the economy will slip into recession, according to Paul Dales, the chief economist at the consultancy Capital Economics.
The eurozone is also limping badly and is riven by doubts over how to deal with the diverging real borrowing costs between different countries which mean Italy has to pay more than Germany despite having the same currency.
The Economist Intelligence Unit (EIU) says in a report that although the US rebounded from the pandemic slump more quickly than other economies, there were signs that consumer spending was weakening. Its base view is that US growth will stop short of a recession, but it could be a close call.
“EIU’s core forecast is that economic growth in the US will slow sharply over the course of 2022 and 2023, owing to stubbornly high inflation, rising interest rates and stalling growth elsewhere,” it said.
“We expect consumer demand to be resilient enough to avoid an outright recession, thanks in part to the tight labour market and strong household balance sheets. However, this does not mean that a recession is completely off the cards.”