Markets all across the world are flashing warning signs that the world economy is perilously close to collapse.
A recession is now a matter of when, not if.
As markets struggled to accept the certainty that the Federal Reserve will continue its most
aggressive monetary tightening campaign in decades to squeeze inflation out of the US economy over the past week,
the pulse of those flashing red lights intensified. even if doing so brings on a recession.
And even if it comes at the expense of clients and companies outside the US.
According to research firm Ned Davis, there is currently a 98% risk of a worldwide recession,
which adds some sombre historical legitimacy to the discussion. Risk of a recession for the company
Powerful US Dollar
The US dollar is extremely important in the global economy and international finance.
And it is now stronger than it was two decades ago.
When the US Federal Reserve raises interest rates, as it has been doing since March,
the dollar becomes more appealing to investors around the world.
The dollar is regarded as a safe haven for money in any economic climate. In a volatile environment,
such as a global pandemic or an Eastern European war, investors have even more reason to buy dollars,
typically in the form of US government bonds.
America’s economic engine has broken down.
Shopping is the number one driver of the world’s largest economy. And the buyers in America are weary.
Consumers have retreated after more than a year of rising prices on everything with no increase in wages.
“Consumers are dipping into their savings as a result of the hardship caused by inflation,
” Gregory Dako, chief economist at EY Parthenon, said in a note Friday.
According to Dako, the personal savings rate remained unchanged in August at 3.5%, close to its lowest
level since 2008 and well below its pre-Covid level of around 9%.
Because many S&P 500 companies are traded globally, the dollar’s strength has volatile implications for Wall Street.
Morgan Stanley estimates that every 1% increase in the dollar index has a negative 0.5% impact on S&P 500 earnings.
Corporate America is getting ready.
Despite historically high inflation, business has been booming across industries for the majority of the pandemic era.
This is due (once again) to the tenacity of American shoppers, as businesses were able to pass on their
high costs on shrinking profit margins to the general public.
welcome to the bear zone
Wall Street has been jolted, and stocks are on track for their worst year since 2008 — just in case
anyone needed another scary historical comparison.
Last year, however, was a completely different story. The S&P 500 rose 27% in 2021, thanks to a squirt of cash pumped
in by the Federal Reserve, which implemented a double-barrel monetary policy in the spring of 2020 to keep financial markets from collapsing.
European bond yields are rising as central banks follow the Fed’s lead and raise interest rates to support their respective currencies.
Bottom line: There aren’t many safe havens for investors’ money right now, and that’s unlikely to change until global inflation
is under control and central banks loosen their grip.
Conflict, War, rising prices, and radical policies all collide.
The United Kingdom, like the rest of the world, has faced rising prices, which have been largely attributed to the massive COVID-19 shock,
followed by trade disruptions caused by Russia’s invasion of Ukraine.
As the West reduces Russian natural gas imports, energy prices have risen and supplies have dwindled.
Some economies, particularly the United States, will be able to withstand the shock better than others due to their strong labour markets and resilient consumers.
“We are in uncharted territory in the coming months,” World Economic Forum economists wrote in a report this week.
“The immediate outlook for the global economy and for a large portion of the world’s population is bleak,” he added, adding that the challenges “will test the resilience of economies and societies and punish the exact human toll.”