‘Dangerous new normal’

EDITORIAL: IMF (International Monetary Fund) chief Kristalina Georgieva’s warning about a “dangerous new normal”, worrying about risks of a worldwide recession, came before the US labour department reported a drop in the unemployment rate to 3.5 percent, lower than expectations of 3.7 percent, and a rise in nonfarm payrolls by 263,000 jobs, more than the expected figure of 250,000.

All this explains why equities, which began the week pleasantly enough on hopes of a possible Fed pivot, took a nosedive at the end of it, Treasury yields rose, and the dollar strengthened as the market begins to price in a fourth consecutive 75 basis points rise in the interest rate; which is sure to push the world’s largest economy into recession in a few months.

Everybody is very worried of course, especially emerging markets vulnerable to damaging currency weakness and a feverish outflow of investment as the Fed’s hawkish squeeze triggers yet another round of hot money carry trade into the higher interest rates of the US market.

Both the IMF and the World Bank are expected to deliver another downward revision of growth forecast for the current year, with the latter also coming under the spotlight because of comments from US Treasury Secretary Janet Yellen; calling for the institution to evolve by “going beyond country-based lending”.

Whether or not Yellen is right to call for a change of approach just as a global recession looms remains to be seen, but she is definitely not right to blame runaway inflation only on the hangover of the Covid lockdowns and Russia’s war in Ukraine.

That is not to say that these issues have not played a part, but the main reason is clearly keeping interest rates too low for too long only to bolster balance sheets of big banks, leaving markets flush with liquidity – in effect too much money chasing too few goods. Now it’s very difficult to see how efforts to mop up this excess liquidity can spare the US, and the global, market of considerable trauma.

The next big challenge would be to avoid tightening too much too fast, which is often the case. Strange as it sounds, the Fed would now like to see growth ease and unemployment pick up a little. But the danger with such things is that triggering job losses can get out of hand very quickly. That is why academic economists have already started warning that once the unemployment rate begins to rise, it will jump very quickly – and it is also a leading indicator of a recession.

The ”dangerous new normal” Georgieva referred to was no doubt very high prices and low growth all around. Yet the remedy, uncomfortably high interest rates, will also make sure that things get a lot worse before they get any better. How this bout with stagflation pushes the IMF and the World Bank to evolve and improve their interactions with developing countries, especially, will tell a lot.

Copyright Business Recorder, 2022