Federal Reserve Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Reserve Open Market Committee (FOMC) June 14, 2023 at the Federal Reserve Headquarters in Washington, DC.
Drew Angerer | Getty Images News | Getty Images
According to Kokou Agbo-Bloua, top economist at Société Générale, central banks are at the “end of the beginning” in their fight against inflation as several factors keep core prices persistently high.
Markets are eagerly awaiting key inflation data out of the US later this week, with the annual core consumer price index (CPI) – which excludes volatile food and energy prices – remaining persistently elevated to date, although the total is beginning to converge with the Federal Reserve’s 2%- Goal.
Continued tightness in the labor market and apparent resilience in the economy mean the market is pricing in a more than 90% chance that the Fed will cut interest rates to a range between 5.25% and 5.5% at its meeting later this month % will increase. according to CME Group’s FedWatch tool.
US inflation slowed to 4% annualized in May, the lowest annual rate in more than two years, but core inflation rose 0.4% mom and 5.3% year-on-year.
Assessing the current status of global policymakers’ efforts to curb inflation, Agbo-Bloua quoted former British Prime Minister Winston Churchill’s remarks in a 1942 speech: “This is not the end. It’s not even the beginning of the end. But it’s maybe the end of the beginning.”
“The number one ‘original sin’, so to speak, is that governments have spent huge amounts of money to sustain economies that have been put into hibernation to save lives. So we’re talking about 10-15% of GDP.” “Agbo-Bloua, global head of economics, cross-asset and quant research at Société Générale, told CNBC.
“The second point – obviously there was the war in Ukraine, there was disruption in the supply chain – but then there was also this massive build-up of excess savings plus ‘greed inflation’, which is the ability of companies to raise prices more than justified is, and.” That’s why we’re seeing record profit margins over the last 10 years.”
Firms have developed a “natural immunity” to interest rates, Agbo-Bloua argued, because they are able to refinance their balance sheets and pass higher input prices on to consumers, who now expect higher prices for goods and services.
“Lastly, the labor market is extremely tight and labor productivity growth is slower, which is now pushing up unit labor costs and this negative wage price spiral is happening,” he said.
“Central banks need to trigger a recession to force unemployment to rise and induce sufficient demand destruction, but we’re not there yet.”
The impact of monetary tightening often lags the real economy by about three to five quarters, Agbo-Bloua said. However, he stressed that the excess savings accumulated during the pandemic provided an additional buffer for consumers and households while companies were able to repair their balance sheets. He noted that this has helped keep the labor market resilient, which is likely to increase this lag time.
bring about a recession
To maintain their credibility, Agbo-Bloua said central banks — and the Fed in particular — need to keep raising interest rates until they trigger a recession.
“We expect the US recession or slowdown to kick in in the first quarter of next year because we believe the cumulative tightening will eventually have its impact and not go away,” he said.
“Then in Europe we don’t see a euro area recession because we see demand 2 to 3 percentage points above supply and so we see more of a slowdown but not a recession.”
As for where the recession will take hold in the US, he indicated that it will most likely “impact on corporate profit margins,” which still remain near record levels, through the “wage growth phenomenon.” , which will essentially affect profits”. .”
“The second point is that consumer spending will also slow down. So we believe it’s a combination of all these factors that should ultimately lead to a slowdown,” he added.
“On the other hand, if you look at where interest rates are going now, it looks like there could be some further tightening ahead of that likely.”
“Recession postponed but not lifted”
This sentiment was echoed by Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, who said that while economies have had a better-than-expected start to 2023 and have largely avoided a technical recession so far, this is more of a case-by-case scenario of the recession was “rather postponed than canceled”.
“The tightening of credit conditions and the slowdown in lending suggest that we have so far managed to delay, rather than avert, the looming recession,” Thooft said in the wealth manager’s half-year outlook on Friday.
“But will there actually be a recession? [place] is far less relevant than how long we might be stuck in a period of below-trend GDP growth.”
He suggested that global growth is likely to settle at around 2.5% this year and next, below the 3% threshold which, if breached, would herald a global recession.
“If projections are correct, global GDP growth would be 15.2% below trend, a scenario last seen during the 2020 pandemic and before that in the 1940s.”