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Weakening economy will not do central banks’ job for them

The cost of living squeeze will push net energy importers including the euro-zone and UK close to, or into, recession. While this will have some disinflationary effects in the medium-term, we doubt that it will bring inflation down on its own. So central banks will still raise interest rates significantly further.
Vicky Redwood Senior Economic Adviser
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Global Trade Monitor

Rebound in trade likely to prove short-lived

Official data showed that world trade rose slightly in April and limited data for May suggest that it probably rose further as disruptions from lockdowns in China eased. But weaker global final demand for goods, due to a gradual normalisation in spending patterns, lower real incomes, and higher interest rates, will be a headwind to world trade in the coming months. And although shipping costs remain elevated, the sharp fall in spot freight rates tentatively points to some easing of inflationary pressures for goods.

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Global Inflation Watch

Hawkish turn to dampen inflation

While inflation has broadened out and surprised to the upside in 2022, we maintain the view that it will fall sharply in the year ahead. For one thing, we expect commodity prices to fall. Even if we are wrong about this, prices are unlikely to rise enough to prevent base effects from dragging heavily on headline inflation. What’s more, goods shortages and logistical bottlenecks have improved in some places, spending patterns are normalising, and inventories are being rebuilt. We expect these trends to continue, causing goods price pressures to ease. And, compared to our last Inflation Watch, we think that central banks will deliver more policy tightening, which should help inflation to settle around targets in two years’ time. The key upside risk is that tight labour markets and high inflation expectations will generate persistently high pay growth. Equally, though, central banks might hike rates too far and trigger disinflationary recessions.

28 June 2022

Global Economics Update

PMIs suggest marked slowdown underway in DMs

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More from Vicky Redwood

Global Economics Update

Is a recession necessary to bring down inflation?

Provided that supply-related price rises ease, we think that it is possible in theory for central banks to bring inflation down from its current high rates without engineering a recession. However, the difficulty of fine-tuning policy suggests they may inadvertently create a recession. Moreover, if high inflation has become more engrained than we think, then a Volcker-shock style recession probably will be required.

16 May 2022

Global Economics Update

Higher inflation chipping away at public debt ratios

One benefit of the current rise in inflation, at least for governments, is that it is eroding the real value of public sector debt. But this will reverse only a small part of the pandemic-related rise in government debt ratios in DMs. And the impact on government borrowing is less helpful; indeed, higher inflation will have an increasingly adverse impact on governments’ debt servicing costs as interest rates and bond yields rise. In view of the subject relevance, we are also sending this Global Economics Update to clients of The Long Run. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

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Long Run Update

The long-run effect of the Ukrainian refugee crisis

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