Slower economic growth on the cards

With inflation continuing to rage, central banks are intensifying their tightening of monetary policies. In the last week alone, there have been sharp interest rate hikes in Canada, New Zealand, the Philippines and South Korea. Yesterday, the Monetary Authority of Singapore also tightened policy, for the third time off-cycle, as it raised its projection for headline inflation this year to 5 to 6 per cent, from 4.5 to 5.5 per cent. This has come on the back of an outsized 9.1 per cent reading for US consumer price inflation in June - a new 40-year high. This has, in turn, prompted speculation that the United States Federal Reserve will hike interest rates more aggressively - maybe even by 1 percentage point later this month, which would put additional pressure on other central banks to follow suit.

Inflation may be close to peaking, with energy and food prices having moderated this month, which could be reflected in future inflation readings. But central banks would need to see a clear trend of lower prices over a few months before they let up on monetary tightening, which could continue till at least the fourth quarter. This almost certainly means that global economic growth will slow in the second half of this year. Forward-looking indicators for the US and the euro zone such as purchasing managers' indexes and measures of consumer confidence already point to a slowdown, prompting economists to cut their growth projections for 2022. Indeed, some are forecasting that the euro zone will slide into a recession by the year-end and even the US could slip into a technical recession - defined as two successive quarters of negative growth - later this month. China's economy is also slowing in the face of renewed outbreaks of Covid-19 infections which have reduced consumption and added to supply chain disruptions.