Business activity slumps globally as inflation hits consumers, feeding recession fears

Consumers faced with generation-high inflation are reining in spending. PHOTO: REUTERS

LONDON (REUTERS, BLOOMBERG) - Economic activity weakened from the United States to Europe to Asia, reinforcing concerns that soaring prices and the war in Ukraine will tip the world into a recession.

A myriad of purchasing managers' surveys published on Tuesday (Aug 23) showed business activity contracting globally and pointed to little hope of a turnaround any time soon.

"Put simply, it's the extremely high rates of inflation that are resulting in households having to pay more for the goods and services they have to buy, which means they have less to spend on other items," said Mr Paul Dales at Capital Economics.

"That's a reduction in economic output, so that's what's driving the recession. Higher interest rates are playing a small part but really it's the higher inflation."

Consumers faced with generation-high inflation are reining in spending while central banks are tightening policy aggressively just when support is needed.

And supply chains yet to recover from the coronavirus pandemic have been further damaged by Russia's invasion of Ukraine and China's strict Covid-19 lockdowns, hurting the manufacturing industry.

US business activity contracted for a second straight month in August, falling to the weakest level since May 2020, S&P Global data showed.

The US figures pointed to weaker demand at both manufacturers and service providers as rising interest rates and high inflation weighed on consumers. New orders shrank for the second time in three months, and employers scaled back hiring.

In Europe, manufacturing drove the drop, but a post-lockdown rebound in services like tourism almost ground to a halt.

Britain's Purchasing Managers' Index managed to remain above the 50 level that separates expansion from contraction, but recorded an unexpectedly large plunge in factory activity.

Over in Asia, Japanese output shrank as a resurgence in Covid-19 cases further depressed demand that was already struggling under the weight of surging inflation.

Australia's service sector contracted for the first time in seven months, though it was offset somewhat by an uptick in tourism. And in China, the government's ongoing commitment to Covid zero and a worsening real estate slump are weighing on consumer and business confidence.

The data paints a bleak picture for the global economy, with most central banks still focused on taming inflation by raising borrowing costs. And while rate hikes will add to the pain of the downturn, they may not even bring excessive price gains back to where they were before this spike, according to investors including Pacific Investment Management Co.

For the euro area, the numbers "point to an economy in contraction during the third quarter", S&P Global economist Andrew Harker said on Tuesday. "Declining output is now being seen across a range of sectors, from basic materials and autos firms through to tourism and real estate companies as economic weakness becomes more broad based in nature."

Germany was a particular weak spot, posting the sharpest decline in output since June 2020 as it rushes to reduce dependence on Russian natural gas amid drops in shipments following the war in Ukraine. In France, meanwhile, activity contracted for the first time in a year and a half.

Feeling the pinch

Inflation has reached multi-decade highs in many parts of the world, forcing central banks to tighten monetary policy as their mandate is to maintain price stability.

The Federal Reserve has lifted its benchmark overnight interest rate by 2.25 percentage points this year as it tries to curb decades-high inflation and is expected to raise it again next month.

Despite that, aggressive policy inflation is likely to stay above the Fed's target beyond this year and next.

Last month, the Bank of Canada surprised markets with a larger than expected 100 basis point increase to its key interest rate and said more hikes would be needed.

The European Central Bank (ECB) kicked off its rate hiking cycle in July, raising interest rates more than expected and is forecast to continue on its tightening path.

Britain's Bank of England (BOE) was one of the first among its peers to raise borrowing costs and is widely expected to continue doing so, even though it has warned that the country faces a long recession as energy bills are expected to push consumer price inflation above 13 per cent in October.

Against this backdrop of elevated inflation and a slowdown in the global economy, central bankers from around the world are gathering this week at the annual Jackson Hole retreat. US Federal Reserve chair Jerome Powell will speak on the economic outlook on Friday.

"Following the signs of an end to rate hikes among the central banks which led the tightening, investors may anticipate that the Fed, ECB, and BOE may end their rate hikes in the first half of 2023," said Mr Richard Flynn at Charles Schwab.

"This year's symposium may provide an early indication of when the turn from hikes to cuts may occur."

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