Why Inflation's Fallout Is Becoming Increasingly Global

President Biden. When you think about the handful of one term US presidents in the past half century, Jimmy Carter or George H. W. Bush, the one thing they all had in common was that the economy was in recession during the second half of their time in office, and those recessions were usually caused by the Federal Reserve slamming on the economic breaks by raising interest rates, which it did this week. You're listening to this outside the US,

you'll know others aren't doing so well either. In fact, as Bloomberg TVs. Lizzie Burden reminds us a bit later, the UK, in many ways has it even worse, the exporters in Asia who rely on all those now very gloomy Western consumers are already bracing themselves for a tough Christmas. Our chief economics correspondent for Asia end the Current, has spoken to some of those exporters in Hong Kong. And you want to stick around for the interview with the

man who sells pop up swimming pools for docks. But first we have our chief economist, Tom Warlick to guide us through it all. Tom, thanks for being here. And I should say we're speaking on Wednesday, a few minutes after the Federal Reserve has raised interest rates by three quarters of a percentage point. That's the biggest single increase since Tom. We've talked about it a lot before. I mean, the Fed has got plenty wrong in the past year,

especially the inflation forecasts. Have they now got this right? So I think the challenge, Stephanie, is that there really isn't a right response from central banks to the type of inflation which the world now faces. If you want to get inflation under control while minimizing the impact on growth, what you really need to do is get Saudi Arabia to increase oil production, get Russia to allow wheat out of Ukraine and get Taiwan to produce more semiconductors so

we can get auto production back online. And the last time I checked, Chair Powell powerful though he is, doesn't have instruments to do any of those things. So a seventy five basis point rate hike is necessary to get inflation under control. But because it's not going to be actually dealing with the root causes of that inflation, unfortunately, the mechanism is going to be by destroying demand, putting more people out of a job, and potentially tipping the

U s economy into a hard landing. Well, you're right that this time does feel different. I mean, we've got used to recessions and financial crisis, which I guess driven ultimately by what's in people's heads, so that their confidence in the future or or in the case of the financial crisis, their fear that banks might be about to go bust. And you can change the situation by just making people feel differently about those things, and the economy

can pick up. But it is true that a big part of the problem today in the US is that there's too much demand, too much money washing around the economy sitting in bank accounts. But that excess demand is interacting with some real supply constraints, which, as you say, the FED can't do very much about. They can't get grain shipments going again out of the Black Sea, and they can't reach a deal with Iran, say that would get Iranian oil back into the globe market and maybe

pushed down the price of it. But I guess Tom, amidst all this gloom, we should remember the other oddity, which is that the U S economy in many ways is in quite good shape. Households maybe feeling very downbeat, but there's still decent growth, and we've got unemployment at record low levels. Yeah, that's right, and I think that's why Powell and co. Have got some hope of negotiating a soft landing here. Household balance sheets are looking pretty robust.

Many households still sitting on a bunch of savings from that pandemic period stimulus business profits. Business profits are looking pretty pretty healthy as well, so businesses can carry on hiring,

carry on investing. Bloomboog economics. One of the things we've done is bundle together an unlucky thirteen set of indicators into a recession probability model, and what that model is telling us right now is that even with the aggressive FED tightening, because I thought household savings are strong, because business profits are strong, the chance of a recession this year, chancefer a recession in two is really quite low. That's some good news for Powell, some good news for Biden.

Of course, as he approaches the midterm elections, the chances of a recession looking further out, though, get much higher. Our model is telling us that by the end of twenty three a recession is actually going to be pretty hard to avoid. Well, they used to say, when the U s sneezes, the rest of the world catches a cold, and funny we saw a bit of that this week with the European Central Bank coming out and worrying that financial conditions were tightening even faster in the Eurozone than

in the US. Even though Europe's inflation problem isn't really on the same scale as America's, when it comes to the UK, you can't help thinking it really does look like it's in a much worse state than America any other major developed economy. So I think the UK is a place which is in a sort of uniquely disadvantageous position right now, Stephanie M. The UK, like Europe, are not energy producers, so they are seeing all the costs of high oil and gas prices and none of the benefits.

The UK, like the US, has an overheated labor market which is adding to inflation repressure. In addition to those problems, the UK has a leadership which love them or loathe them right now, I think we could all agree are not unequivocably focused on economics as their number one priority. And of course there's the drag which comes from Brexit and the additional regulatory burdens and uncertainty that brings. UM. So we see recession risk for the United States heading

into the end of twenty twenty three. In the UK the risk is actually a bit more front and center, and indeed we think the UK economy is already going to be contracting in the second quarter of this year. Well, we can hear more on that subject now from Lizzie Burden, who someone of you will remember from her days as a lowly economic reporter. She's now an economy and government

correspondent for Bloomberg Television. The UK is sliding into a recession in all but name in two statistical quirks, like the extra bank holiday in June to celebrate Queen Elizabeth the second Platinum Jubilee. May mean that Britain avoids two consecutive quarters of contraction, but almost every other economic metric

is screaming slow down. Consumer confidence, for example, is already below levels seen in any economic downturn since at least the nine seventies, and that's before the full effects of the fastest inflation in decades kicking. Meanwhile, the housing market, which of course the British are obsessing a there is showing some signs of cooling, with demand for mortgages dropping as interest rates rise. Here's Bank of England Deputy Governor John Cunliffe in an interview with I t V. We

see evidence of slow down in the housing market. I think there are some some stores in the wind that the market is starting to turn. As you know, the bank expects the economy, it's that it's already slowing and we expected to slow further slow quite a lot over the next year or so. And I think yes, that

will have an impact on the housing lorge. Now that leaves post pandemic Britain on course to underperform every other major leading economy next year, posing a severe headache for both Bank of England Governor Andrew Bailey and Prime Minister Boris Johnson. With inflation set to peak in double digits in October, five times the Bank of England's two percent target, Bailey and his colleagues have little option but to keep raising interest rates, even if it means making the cost

of living crisis worse in the short run. For Johnson, whose own party almost toppled last week, rescuing the economy is vital if he's to survive much longer. In an interview with Bloomberg's Kitty Donaldson, even the characteristically tiggerish Prime Minister had to admit the government's limits. We're going to have a difficult period and we've got to be absolutely clear with people. It is going to be difficult, and the government cannot solve every problem and we can't cover

everybody's extra cost. But what we can do is make sure that we deal with the underlying causes of inflation but also keep our economy strong and open to investment. We say we be strong, but usink we're headed towards recession. That's not necessarily at all. I think that there are ways forward for the UK that are incredibly exciting. So if we make sure that we have a proactive approach to talent from a broad order, control immigration but allow the talent that we need to come in, we fix

our energy supply issue. Is we get we fix the issues in the UK labor market. I mean, one of the incredible things about the economy right now is that unemployment is at its lowest level since I was ten years old. Signs of the mounting pressure on households and businesses were revealed in data this week. On Monday, the latest GDP figures showed that the economy unexpectedly contracted in April.

On Tuesday we learned that real wages fell the most and at least twenty one years, as pay rises were devoured by price growth, And on Friday, data are expected to show that retail sales also fell in May. Sandwich. Between those reports, the BOE on Thursday is expected to deliver an unprecedented fifth straight hike to take rates to

their hyacinths two thousand and nine. What's clear is that the fragility of the economy as it emerges from the pandemic means that the UK is facing a long period in the dull rooms, hobbled by continued feeble productivity growth, rather than a short, sharp downturn. New legislation that would override the part of the Brexit deal pertaining to Northern Ireland could make things even worse if the European Union

retaliates with the trade war. Take a listen to this warning from Stephen Kelly, chief executive of Manufacturing Northern Ireland, when he was on Bloomberg Radio. This is the one thing that many in the UK don't understand. The EU can within ours and produce particular controlled, particular aggravations do will directly impact UK industry, the UK economy and consumers. This isn't necessarily about applying the applying huge tariffs on

British cheese or any other item. They could have a whole series of things that would cause almost instantaneous problems for the UK and that's a very dangerous thing to do in the midst of across the living crisis and

across the down business crisis and the UK. Even before the build the Bank of England saw a major dropping output of around one percent in the final quarter of the year followed by a small contraction in Tree and stag nation in Similarly, the Organization for Economic Cooperation and Developments outlook for the UK next year is the worst among major nations. In an interview with Bloomberg Television, the o e c d is chief economist Lohens Boon explained why as here all reasons why and the UK has

lower growth than whether to seven economies next year. One is the higher inflation, the other is tighter and faster, faster monitary policy tightening and also fights the fiscal consolidation. So what we're recommending to the UK is actually to consider the pace at which fiscal consolidations taking place if if it was was too slow as fast as what we're describing, So more tax cuts needed, says the a e c D. And a new fifteen billion pounds support

package from Chancellor Rishi Sunac only offers temporary relief. Here's Rebecca McDonald, chief economist at the Joseph Rowntree Foundation, giving evidence to lawmakers of the Treasury Select Committee. Even before this period of inflation, there was a lot of people who were in debt, a lot of people experiencing poverty. It doesn't even start to kind of attack those longer term issues. It simply is a It isn't effective, but it's a kind of short term emergency in the package.

So even if the technical definition of a recession isn't met all that adds up to one of the bleakest periods for the UK economy in decades. So Lizzie mentioned that this line about you know, it might seem like a recession even if it isn't formally a recession. We're certainly getting very poor growth forecast now for the UK this year and potentially next year. The UK economy may barely grow, but we might technically miss the definition of

a recession. That's something that you've looked at, I know, particularly for the US, but also for some other countries, this idea that we even it may not be a recession, but it might actually feel worse than that for households

because of the peculiar nature of this shot. Do you want to just tell us a bit more about that, Tom, So, it's kind of an oddity of economics that the macro picture often doesn't match up with the lived experience of many households, and I think that's especially true in the case of a recession. So if we think about a really severe recession in the United States, you'd see perhaps

ten percent of workers unemployed. They're having a terrible time, but for nine of workers, the recession means their wages might go up a bit more slowly, but they still have a job and they're not having too terrible at time. Contrast that with the situation today, where we're not in a recession. Unemployment is very low, but inflation is super high.

That's something which impacts a hundred percent of households. Whether you're unemployed, whether you have a job, you're experiencing the same, very very high increase in prices, which is eroding your spending power. So we're not in we're not in a recession right now in the United States, but for many households it's going to feel not just like we're in a recession, but in many ways worse than it would

do if we're in a recession. Finally, Tom, if you can bear it, we should round this off and think about the global picture and especially the prospects for emerging market economies, because this this combination of rising interest rates in the US slowing Western demand. I mean, historically that has been very bad news for emerging market economies, and now you have China lockdowns weakening the picture for China too. Um in a few months time, do you think we're

gonna be looking at a string of emerging market crisis. Yeah, I think that's right, Stephanie. I think there's there's two trends globally which you're having a negative impact on all emerging markets. So the first is the sharp slowdown in global growth. You mentioned the China lockdowns. That's a big blow to demand from China. Europe obviously slowing sharply, partly as a result of Russia's invasion of Ukraine. Global growth

bad news for the emerging markets. At the same time, you've got the FED aggressively hiking rates seventy basis point rate hike at the June meeting. Global borrowing costs are going up, and that's bad news for emerging markets which are dependent on foreign capital to finance their operations. At the same time, you've got another crucial trend for the global economy right now which is going to be playing in a different way for different emerging markets, and that's

the sharp increase in commodity prices. If you're a commodity importer, like Sri Lanka for example. All three of these trends we could global growth, higher global borrowing costs, and higher commodity prices are hitting you at exactly at the same time, and that's why Sri Lanka has slid into crisis. And that's a risk facing other emerging market commodity importers as well.

If you're a commodity producer, though, like Brazil for example, big producer of iron ore and soybeans, the increasing commodity prices is actually a positive for you and it's offsetting some of the negative impact of weaker global growth and higher global borrowing costs. Well. Our chief Asia economics correspondent in the Current has gone to talk to some of the exporters who are bracing themselves in Hong Kong for declining demand in the West. Is his piece. We have

a patent on this one. We'll opened up by this. Normally, for pool you need to put air by pumping air into the wall, and that is Sydney you. He's showing me how to use their pop up swimming pools for dogs. His company, Prime Success Enterprises makes all kinds of cooling products in China for pets to use in hot weather, you know, so that your dog would not be a hot dog. So so as long as you moists the pop up pool he's shown me now was their best

seller during the pandemic. Demand for pet products rocketed over the last two years as people spend more time at home with their pets. Well, things are changing. Like other manufacturers across Asia, you is seeing signs that soaring inflation and rising interest rates in the West are starting to impact consumer demand for his full range of products that

include children's play tents and other items for families. We have been expecting a better growth than what we have been seeing now because like a last two or three months, we see that the overseas market opening up, you know, a lot of restrictions are being lifted in Western countries.

We were expecting a very like a stronger growth, you know, in terms of demand, but we did not see that trend clearly yet at the moment, you know, the business has been steady, but then we expect it to be stronger. This could be an important signal from Asia, known as the world's factory floor, for where the global economy is headed.

Robust exports from Asia, especially China, have been a major dynamo in the recovery from the pandemic, but there are signs that that demand is fading as inflation hits consumer pockets and as consumers shift their spending from goods to services. Supply blockages stemming from China's COVID lockdowns and the Russia's invasion of Ukraine are also impacting. Steve Schwong is one of those who has noticed a shift. He runs a

company called pro Vesta Group. Yes we are that are and d and manufacturing company with headquarters in Hong Kong, two factories in Donguan and one in Manila, the Philippines. Provis that makes products such as power systems for campervands and other recreational vehicles like Sydney. You Chung also saw his order book hit records during the pandemic as people were forced to vacation closer to home. So for me, actually during year twenty twenty and year one, we have

a record high growth. UH during my twenty five years of business, basically thirty to increase every year. Chuan told me that overall demand remains are bust, but it doesn't think export orders will repeat the levels that did during the first years of the pandemic. Well, you know, you can feel the in freshion and also the very high interest rate. The spending power in our major markets, as I mentioned in 'sa in Europe is becoming very soft, so trail will still go, but it won't be as

high as I mentioned in E one. Some manufacturers are even seeing weakening orders as far ahead as for the Christmas shopping season. Ens Jam is a sales manager for a Guang Joe based manufacturer. They make a wide variety of products from watering cans and tablecloths to Christmas themed storage bags for customers in the US and Western Europe. Well then they compared to last year, orders have declined quite a lot down on the same I think the inflation in the US and Europe has had a very

big impact on our business. I manage our online orders and they have declined by more than half from last year that you banished. The slowdown isn't yet at the point of a trade recession. Both analysts and manufacturers say underlying demand remains solid and consumers have money to spend. Chinese exports have rebounded from lows hit during shanghai'st lockdown, suggesting they're still demand still this year's big inflation surge and the hawk is turned by central banks are going

to show up and order sooner or later. That's according to Stanley Zito. Hi. I'm Stanley Zito, the executive chairman of leaver Style, a Hong Kong listed government apparel supply chain company. Details company makes high end garments for leading global brands. He told me up till now, shipments have remained strong because of the post COVID rebound, but he doesn't see it lasting. But I must admit that I don't see this continuing into deep into the second half,

especially from Q four onwards. So we're seeing there is a perfect storm of several macro economic factors that are going to seriously dampen consumer demand. While policy makers are trying to calm investor fears about the hard landing and they say they're consumed have enough resilience to cope with rising interest rates, manufacturers like Zito remain to be convinced. Yeah, I think it's uh what what what happened last year when the FETE said, oh, inflation is only temporary, but

it turned out to be very uh structural. Uh show showed us that even the FET you know, with all that's analytical powers and you know, all the data it has. UH is not a perfect forecaster. And so right now, whatever central bankers and governments say, you know, I hope that they are right, that the consumer can can take that, but you know I don't. I won't believe in it

until I see it and the current Bloomberg News. That's it for this episode of Stephonomics will be back next week with, among other things, news from Sri Lanka and that debt crisis that Tom Aulick mentioned. In the meantime, do please rate the show if you like it, and check out the Bloomberg News website for more economic news and views on the global economy. You can also follow

at economics on Twitter. This episode was produced by Magnus Henrikson, Summer Sadi and Elina Ganatra, with special thanks to Tom Alick, Lizzie Burden, You, Jane You, and Young Young. Mike Sasso is executive producer of Stephonomics and the head of Bloomberg Podcast is Francesca Leag