Global Economic Recovery Threatened By Banking Strains And Inflation

Across the world, activity is supported by a robust services sector, but this strength also drives up inflation.

‍

After a sudden slowdown at the close of last year, large portions of the global economy are still showing indications of a moderate recovery. But, the improved outlook is endangered by persistently rising prices and financial constraints in the United States and Europe.

‍

Business surveys released on Friday showed increases in activity across Europe that were largely driven by service providers. In Japan, a similar acceleration was helped by the influx of Chinese visitors who had been delayed by the Covid-19 travel restrictions.

‍

The situation could swiftly worsen if banks drastically cut back on lending in response to increased regulatory scrutiny and the requirement to give depositors higher returns. In addition, persistently significant rise in consumer prices may lead to further hikes in central bank interest rates.

‍

This year, policymakers in the U.S. and Europe in particular must navigate hazardous currents. Sticky inflation forces central banks to keep hiking rates in an effort to slow down economic growth, but these higher rates are producing growing problems in some areas of the banking industry. If these difficulties ultimately lead banks to tighten credit, this could cause the economy to cool more than central banks had anticipated.

‍

The economy of the U.S. and Europe have been shaken by recent rate increases, with banks being the first victims of the shock treatment. Markets were shaken by the failure of Silicon Valley Bank and Signature Bank, and the exodus of depositors fueled concerns about contagion. To avoid a panic, regulators helped uninsured depositors. The acquisition of longtime rival Credit Suisse Group AG by UBS Group AG in Europe was supervised by regulators. Credit Suisse Group AG had been battered by years of self-inflicted crises and trading losses.

‍

The stresses have been contained, according to central bankers and regulators, but it might take months for confidence in the financial system to fully recover.  

‍

The head economist of Sweden's SEB, Jens Magnusson, remarked, "There are good opportunities to contain this." "But, just because there is a good likelihood doesn't necessarily mean it will happen. The time is definitely not right for complacency; you cannot sit back and declare that this is finished. We'll have to pay close attention to any indicators of stress for several weeks, if not months.

‍

For the time being, Europe's economy continues to demonstrate unexpectedly strong growth. S&P Global's business surveys show that growth picked up in the first three months of the year, defying predictions of a recession after energy costs spiked following Russia's invasion of Ukraine and over a year ago.

‍

Together with Europe's fortitude, China's decision to ditch its zero-Covid policy has suggested a better-than-anticipated prognosis for the world economy this year. Also, business surveys indicate beneficial effects outside, even though recent data indicate an uptick in activity within China itself.

‍

While Chinese tourists raced to take full advantage of their newfound freedom to travel abroad, Japan's services industry expanded at its quickest rate since October 2013.

‍

For bankers who have been busy dumping cold water on the economy, stronger growth has its own drawbacks. Even if the company surveys also indicated a reduction in price increases, those increases are still happening at a very high rate by historical standards.

‍

According to Chris Williamson, chief business economics expert at S&P Global Market Intelligence, "such stubborn inflation expectations, fueled mainly by the service sector as well as wage growth costs, will be a major worry to decision makers and suggest that the more work may be needed to bring inflation down to target."

‍

Investors reduced their anticipation of future interest rate increases by the top central banks in the world when problems in the financial sector first surfaced. But in the last ten days, those banks have announced a number of rate increases, some of which hinted that there would likely more to come considering the persistence of strong inflation.

‍

In contrast, Jerome Powell, the chairman of the Federal Reserve, suggested that the depth of any lending slowdown following the bank run a few weeks ago would determine if Wednesday's increase was the final one for the time being.