There are signs that the global economy is beginning to shrink due to high costs.

  • Global inflation is skyrocketing and signs of recession are multiplying.
  • US GDP for the second quarter of 2022 is released Thursday as the curtain raiser to the central banker’s annual Jackson Hole symposium.
  • International central bankers, Federal Reserve officials, other policymakers, and academics meet every year to discuss the economy. Will they be able to avoid a hard landing in the economy?

The economic landscape

The European Union’s economy is firmly in the doldrums, and the printouts of economic data validate this picture.

August’s preliminary European consumer confidence figure is approaching the lows of the global financial crisis (GFC).

S&P Chart of European Consumer Confidence

Most executives in service industries, the largest sector in developed economies, overwhelmingly forecast a bleak outlook for their businesses. Polls suggest most will take the path of saving and saving rather than spending and expanding.

S&P U.S. Services PMI declines

The trend in the data is down, and it is possible that the markets will be even more painful at the end of the week following the high impact American durable goods orders, the second quarter American GDP and the words of the symposium of Jackson Hole.

Unsurprising results

The costs of doing business are high in all areas. The pandemic and the return of conflict in Europe have slowed and diverted supply lines and the movement of labour.

Restrictions in international and domestic movement, an aging population and an inflated stock market giving pre-retirees an outlet are some of the reasons wages are rising.

Australian companies need to share more of their profits with their employees through wage growth.

Pressures on wages and commodity prices do little to improve the outlook for business leaders.

Monetary Policy

Recent periods of easy money are receding, and policymakers faced with high inflation will continue to rein in unnecessary expansion and spending.

The size of the US Federal Reserve’s balance sheet is well above all-time highs. Lately, the board has adopted the phased approach, slowing asset purchases and allowing certain debt instruments to mature without renewal.

Some markets reacted. Oil has been trading lower since June this year to hover above the US$100/barrel level.

There is little the Fed can do to assuage geopolitical grievances. Coal, gas, zinc, aluminum, wheat, seed oils and many other commodities remain stubbornly high on threatened or diverted supply routes.

Likely Jackson Hole Talking Points

We can expect Western economic policymakers to stay the course in their attempts to control inflation. Any significant stimulus package introduced now to avoid a downturn will only fuel massive price hikes and crush businesses.

With the current trajectory, the hope is that a few of the more wasteful companies will be dissolved or absorbed into more suitable operations, creating a firmer basis for productivity to catch up with demand and drive down prices.

Australian Perspectives

Australia is very lucky as it has a diverse portfolio of clients from East and West.

China is now looking to reopen its doors after the pandemic, benefiting from the diversion of supplies of legacy raw materials from Russia to Europe. The Chinese economy is better protected from inflationary pressures than the West.

As sales of coal and other raw materials from Australia to Europe inevitably begin to decline in the face of price-driven demand pressure, there is hope that China can take a part of the relay and prevent Australia from sinking into a recession with Europe.

About Michael Bill

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