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Inflation continues to rattle the global economy, forcing monetary authorities to strengthen efforts to extinguish it.
Consumer prices in the US increased last month by more than forecast, which will likely prod the Federal Reserve to raise interest rates by 75 basis points for a third-straight meeting this coming week.
UK inflation remained close to a four-decade high and the economy barely expanded as industrial production and construction weakened. In Argentina, inflation shot up the most in three decades and prompted the central bank to raise its benchmark rate to a whopping 75% in an effort to prop up its currency.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
US consumer prices were resurgent last month, dashing hopes of a nascent slowdown and likely assuring another historically large interest-rate hike from the Fed. Against a backdrop of robust labor market conditions that’s driven up wages, odds favor the central bank becoming that much more aggressive to take more wind out of the economy’s sails with the goal of bringing inflation down.
President Joe Biden hailed a tentative railway labor agreement, one that he helped broker and that averted an economically perilous nationwide work stoppage less than two months ahead of the November midterm elections. The stoppage would have been the largest of its kind since 1992 and threatened to cost the world’s biggest economy more than $2 billion a day.
Britain’s inflation eased from its highest rate in four decades after petrol declined, still leaving the pace of price increases uncomfortably high for the Bank of England. The Consumer Prices Index rose 9.9% in August from a year ago, compared with 10.1% in July.
The UK economy recovered more slowly than expected from a slump triggered by an extra public holiday in June, with industrial production and construction both shrinking.
Japan’s trade deficit ballooned to a record in August that highlights the increasing pain of the weak yen as import costs spiral upwards, adding to pressure on the country’s economic recovery.
China’s economy showed signs of recovery in August as Beijing rolled out stimulus measures to counter a slowdown, although a property market slump and Covid outbreaks continue to weigh on the outlook. Industrial production, retail sales and fixed-asset investment all grew more last month than economists expected.
Argentina’s central bank raised its benchmark interest rate for the ninth time this year to 75% in a bid to shore up its currency and curb inflation nearing 100%. Central bankers made incremental rate increases early in the year but over the past three months they have ramped up hikes, with a combined 23 percentage point increase since July.
India’s central bank, which last month vowed to do “whatever it takes” to fight inflation, is expected to refocus efforts toward its own version of a soft landing where it tackles price gains while trying to ensure growth remains among the world’s fastest.
From Mexico to Brazil, persistently high inflation is widening the gap between rich and poor in what is already the world’s most unequal region. It’s stoking political upheaval that could be a foretaste of what lies ahead as policy makers the world over struggle to meet demands to increase social spending.
Around the world, soaring borrowing costs are squeezing homebuyers and property owners alike. From Sydney to Stockholm to Seattle, buyers are pulling back as central banks raise interest rates at the fastest pace in decades, sending house prices falling.
©2022 Bloomberg L.P.
Demand for Aluminum Slows in Another Sign of Troubled Economy – Bloomberg
4 experts explain how to prepare for a new economic reality and protect the most vulnerable – World Economic Forum
- Chief Economists are mostly in agreement that the outlook for the economy is bleak and that recession is likely.
- This new reality will take its toll on inequality and widening societal gaps.
- Four experts explain how policies might address the immediate crisis with an eye to beefing up resilience in the long term.
The latest World Economic Forum Chief Economists Outlook suggests a global recession is “somewhat likely” and the fallout will take its toll on inequality. Just this week, the OECD put out a similar message in its interim report, warning that recent indicators have “taken a turn for the worse”.
Chief Economists have been nearly unanimous in predicting wages to fail to keep pace with surging prices, with nine in ten expecting real wages to decline in low-income economies in 2022 and 2023, alongside 80% in high-income economies.
This will see a continuing deterioration of household purchasing power compounded by aggregate pressures on basic necessities such as food and energy.
Saadia Zahidi, Managing Director at the World Economic Forum highlights “Growing inequality between and within countries” as the “ongoing legacy of COVID-19, war and uncoordinated policy action.” She says, “With inflation soaring and real wages falling, the global cost-of-living crisis is hitting the most vulnerable hardest. As policy-makers aim to control inflation while minimizing the impact on growth, they will need to ensure specific support to those who need it most.”
We asked four chief economists who took part in the survey which policies they think will protect the most vulnerable and how this new economic reality might be steered to better prepare for the future.
‘Pricing carbon (globally) must play a central role’
Christian Keller, Head, Economics Research, Barclays
The one change I would make to the global economy to better prepare us for the future would be to implement a global carbon pricing mechanism. The earth’s climate is the ultimate ‘tragedy of the global commons’: individual and collective incentives are misaligned, because the price of harmful economic activities does not accurately reflect the true social cost. It results in the over-production of carbon-intensive assets to the ultimate detriment of global welfare.
Pricing carbon emissions – or the internalization of their negative externality – is the first step to solve this ‘market failure’. Increasing their price, dis-incentivizes carbon emissions, while also generating public revenues to compensate groups negatively affected by the transition and/or fund public goods such as low-carbon energy infrastructure.
Such a carbon pricing mechanism would ideally be global in nature, to avoid regulatory arbitrage and cross-border carbon leakage.The principles of such a mechanism are textbook economics, but many more questions arise in practice, including how to determine the true ‘marginal external costs’. Naturally, it would be a discovery process and there would be glitches. However, if one does believe climate change is a threat and that it is caused by carbon emissions, pricing carbon (globally) must play a central role.
‘Build a resilient and sustainable pricing strategy’
Gregory Daco, Chief Economist, EY-Parthenon, USA
The various drivers of economic activity that were previously taken as a given will now warrant much more attention from businesses, investors and consumers. There will be five central tenets to this new paradigm: inflation, labour, supply chain, the cost of capital, and environmental, social and governance (ESG) and sustainability issues.
While the current focus is that inflation is hovering at multi-decade highs in many places around the world, there doesn’t appear to be a broad realization that inflation persistence and volatility are likely to be a key feature of the outlook over the next few years. As such, businesses will need to consider building a resilient and sustainable pricing strategy that is nimble enough to navigate a world where demand will ebb and flow more significantly than in the past few decades. Cost management and productivity gains will likely also have to be central to companies’ holistic inflation strategy.
In an environment, where talent is not just more expensive but is also perceived as more valuable and where pricing power will be limited by softening final demand, business executives will increasingly have to focus on productivity and efficiency gains to offset higher labor costs. This won’t be easy, but it will be central to their success.
Supply chain issues have been a central part of the inflation story of the last few years, and it would be misguided to believe that these issues will dissipate overnight. Businesses will need to build supply chain resilience while being aware of economic, geopolitical and political undercurrents.
The rise in the cost of debt has led business executives to put some investment plans on hold, while the large fluctuations in equity valuations have created a wedge between buyers’ and sellers’ perception of the true value of an asset. In addition, the significant US dollar appreciation against most other currencies has created a new set of considerations for multinationals having to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.
Over the last few years, businesses have increasingly focused on ESG and sustainability issues to create long-term value, develop a sense of purpose, and provide trust and confidence to the market. The last few months have brought about a sense of urgency to these developments.
‘Address structural factors to reduce future vulnerabilities ’
Eric Parrado, Chief Economist; General Manager, Research Department, Inter-American Development Bank
The global inflationary crisis is having profound consequences on the well-being of populations around the world, especially in emerging and developing economies. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.
Policies should have a short term and long-term focus. In the short-term governments should provide transfers for the poorest populations to compensate increases in food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be designed and funded carefully to avoid larger fiscal imbalances that could contribute to higher inflation rates.
Long-term policies address structural factors to reduce future vulnerabilities. Investing in agricultural innovation, research and climate change adaptation are key to improving productivity in agro-industries, food system resilience and strengthening food security in the long run.
A greater focus should be placed in climate change mitigating policies to ensure agricultural frontiers are not displaced further, and food supply is not restricted. At the same time, countries can avoid directing scarce fiscal resources to cover the costs of dealing with costly man produced natural disasters.
‘Drive employment opportunity and protection’
Svenja Gudell, Chief Economist, Indeed
Access to good jobs is an integral part of both obtaining and sustaining quality of life and well-being. From a labour market perspective, policies which could dramatically benefit vulnerable populations include: skills-based hiring, pay and wage transparency, second chance hiring, accessibility tools and accommodations, and inclusive and unbiased hiring – to name a few. While some leaders look to a one-size-fits-all policy to address cost of living issues, the truth is this rarely results in the desired outcome. Instead, policymakers must consider both the broader, long-term picture, as well as the unique situation within industries, locations, and individual needs to help close these gaps.
As we face hardships ranging from increased cost of living, global warming, geopolitical tensions, etc., employment opportunity and protection for all is key to future prosperity. The micro and macro benefits of adequate, gainful employment enable an increased quality of life and well-being, opportunity for economic mobility, and benefits to both physical and mental health. Ultimately, on a global scale, we must identify and build on technology that is being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to drive employment opportunities and protection for workers.
What next for the global economy? 3 experts have their say – World Economic Forum
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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