So many economies around the world are in completely opposite situations.
Some central banks are cutting rates, some are pausing, and others are hiking.
The next few months are going to be really interesting.
Follow us @KobeissiLetter for real time analysis as this develops.
— The Kobeissi Letter (@KobeissiLetter) August 28, 2023
Eurozone credit growth posted its 12th straight decline pic.twitter.com/FQQ4ITC3ck
— Don Johnson (@DonMiami3) August 28, 2023
Central Bankers Face Up to Changing Global Economy With No Playbook at Jackson Hole
At the Jackson Hole meeting, global officials expressed concern over the new challenges brought by the pandemic and Ukraine war, disrupting established economic relationships. They called for a revised approach to address persistent price pressures, market volatility, and the global debt problem, particularly in emerging economies. Despite confidence in battling inflation, officials warned against early victory declarations and highlighted the need for new models to address sector-specific shocks. There was also doubt about the capacity to provide significant fiscal support in another large shock, indicating a precarious position.
Why Global Inflation Pressures Could Become Harder to Deal With in Coming Years
Global trends like rising trade barriers, aging populations, and a shift to renewable energy are intensifying inflation pressures, complicating central banks’ efforts to control inflation. The reversal of globalization, as companies shift away from China, increased domestic manufacturing subsidies, and an aging workforce are causing supply shocks and price pressures, despite cooling factors like China’s weakening growth. These changes challenge central banks, increase goods costs, and risk economic fragmentation.
Central Bankers Are Not Sure They’ve Raised Rates Enough
Global central bankers are cautiously optimistic as inflation slows but fear it’s not sustainable. The Federal Reserve, having raised rates aggressively, faces concerns about stronger-than-expected U.S. consumer spending preventing further inflation decline, and a potential global downturn due to China’s property sector slowdown. Despite calls to tolerate higher inflation, officials struggle to balance the risks of raising rates too little or too much amidst new inflationary shocks like the Russia-Ukraine conflict and retreating globalization. Some officials lean towards an extra rate increase with flexibility if the economy slows faster than anticipated.
China’s Worsening Deflation Is Rippling Across the Globe
China’s economic slowdown, initially expected to drive a third of global growth, is causing worldwide concern. As China’s imports, including construction materials and electronics, decline, global economies are preparing for a significant impact. U.S. President Joe Biden referred to the situation as a “ticking time bomb.” Furthermore, global investors have withdrawn over $10 billion from China’s stock markets, both Goldman Sachs Group Inc. and Morgan Stanley have lowered their Chinese equity targets, with the former also highlighting potential regional spillover risks.