The dangers of stagnation wreak havoc on the world economy as a result of war

The world economy is increasingly surrendering to the threat of stagnation, reminiscent of its 1970 ordeal, which is already a headache for global finance chiefs navigating the outcome of the Ukraine war.

As China’s economy slows sharply and the Federal Reserve’s step-by-step commitment to crush inflation raises concerns about a massively difficult landing, the risk warning is intensifying. A group of seven finance ministers and central bankers, who met in Germany today, are now showing complete concern that stagflation cannot be stopped.

“The war in Ukraine has had an additional impact on the economy,” German Finance Minister Christian Lindner, who organized the rally as soon as the talks began near the forest, told reporters on Thursday. “It simply came to our notice then. That’s why we need to discuss what we can do to avoid stagnation. ”

This comes after his US counterpart, Treasury Secretary Janet Yellen, remarked on Wednesday that “high food and energy prices are having a stabilizing effect, such as depressing output and spending and pushing up inflation around the world.”

The worst combination of rising inflation, stagnant growth and rising unemployment is the worst case scenario for central bankers and lawmakers who have to choose which disease to fight. With 2021 betting that inflation will fade, policymakers are now pointing out that prices are their primary concern, even if that war reduces demand and employment.

While the likelihood of a global recession is low, at least this year, the pace of events is warning policymakers and investors as financial market recession and growth forecasts are becoming less revised.

Last week the level of recession revealed as China’s data for April showed that consumer and business activity hit a wall amid the government’s aggressive cowardly-zero policy. Japan, the world’s No. 3 economy, shrank in the first quarter as import costs rose by a weaker yen, hurting consumers due to trade and virus restrictions.

In the United States, Fed Chairman Jerome Powell has said he will continue to raise rates until there is “clear and credible” evidence that inflation is receding. The rise in UK prices has already reached a 40-year high, and Bank of England Governor Andrew Bailey has warned that rising food costs could have “apocalyptic” consequences worldwide.

Retail giant Walmart Inc. and Target Corporation’s earnings report showed a slowdown in spending on general merchandise items, another sign of cooling global consumption.

The hammer of the panic market. The S&P 500 index slipped 4% on Wednesday, its biggest one-day loss since 2020. Its 17% year to date fall is the worst start of any year since at least 1940.

“We have warned of a Pinsar movement between the Fed hackneyedness and the Eurasian recession,” said Freya Bemish, head of macro research at TS Lombard, using Eurasia as a reference for Asia and Europe. “This pincer means stagnation for Eurasia until the Fed is satisfied that US inflation is under control, which means that next year the US recession, inflation is still high.”

The biggest push is coming from China, where analysts are reducing their outlook. Standard Chartered Plc, Goldman Sachs Group Inc. And Citigroup Inc. Everyone has forecast growth this week, as Bloomberg Economics has forecast, which is now down from 3.6% to just 2% growth for the year.

Matthews portfolio manager Teresa Kong says the downturn in Chinese production in particular is a clear warning. “This does not bode well for the rest of the world’s GDP,” he said.

However, global hard landing is difficult to define, says Stephen Jane, who manages Uregon SLJ Capital, a London-based hedge fund and advisory firm.

“After the sharp expansion in 2021, if the economic growth of an economy registers two consecutive quarters of negative negative growth, which is likely to be seen in several economies, but year after year growth is healthy positive, is it a difficult landing?” Jane said. The world has gone smoothly in past recessions, led by the United States, which indicates a recession or recovery, he noted.

Current data could mark the global trend as inflation should slow in the second half and China’s economy will stabilize, said Sayuri Shirai, a professor at Keiu University and a former board member of the Bank of Japan.

“Economic growth is clearly slowing down,” he said. “But I don’t think the whole world is likely to go into stagflation at this stage.”

European Central Bank President Christine Lagarde proposed a similar analysis for the eurozone earlier this month. He emphasized in an interview with a Slovenian newspaper that “stagflation is not our baseline scenario” and “the current situation cannot be compared to the 1970s.”

Conversely, others feel that it is already too late to avoid the result. Mohamed El-Arian, chair of grammar fund management, former CEO of Pimco and contributor to Bloomberg Opinion, has given Bloomberg Television a gloomy outlook for the United States.

“What is inevitable is stagnation,” he told Bloomberg Television’s Francine Lacua on Wednesday. “We have seen growth slow down and we can see inflation remain high.”

© 2022 Bloomberg

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