U.S. Federal Reserve Chairman Jerome Powell speaks during a news conference after the Federal Open Market Committee (FOMC) meeting at Federal Reserve headquarters in Washington, DC, June 14, 2023.
Drew Angler | Getty Images News | Getty Images
Société Générale chief economist Koku Agbo-Blua said central banks were in the “beginning stages” of their battle against inflation as core prices remained high due to a combination of factors.
Markets are eagerly awaiting key U.S. inflation data due later this week, with the core annual consumer price index (CPI), which excludes volatile food and energy prices, remaining elevated so far, although headline figures are edging closer to The Fed’s data target of 2%.
Continued tightness in the labor market and apparent resilience in the economy means markets are pricing in a more than 90% chance that the Fed will raise interest rates to 5.25% to 5.5% at its meeting later this month.According to the CME Fed Watch Tool.
The annual rate of inflation in the United States cooled to 4% in May, the lowest annual rate in more than two years, but core inflation rose 0.4% month-on-month and 5.3% year-on-year.
Assessing the current state of global policymakers’ efforts to curb inflation, Agbo-Blua quotes former British Prime Minister Winston Churchill from a 1942 speech: “It’s not over yet. It’s not even The beginning of the end. But it may, this is the end of the beginning.”
“Arguably the number one ‘original sin’ is that governments spend a lot of money to keep economies in hibernation trying to save human lives, so we’re talking about 10-15% of GDP, Societe Generale Economics, Cross Asset and Quant Research Global Director Agbo-Bloua told CNBC.
“Second point – obviously there’s a war in Ukraine and supply chain disruptions – but then there’s also a massive buildup of excess savings, coupled with ‘greedy inflation’ so companies have the ability to raise prices beyond reasonable limits and that’s why we’ve seen record margins over the past decade.”
Agbo-Blua argues that companies have developed “natural immunity” to interest rates because they are able to refinance their balance sheets and pass on higher input prices to consumers, who now expect goods to And the price of the service goes up.
“Last but not least, a very tight labor market with low labor productivity growth is pushing up unit labor costs, leading to a negative spiral in wage prices,” he said.
“Central banks need to trigger a recession, force unemployment up and cause enough demand destruction, and we haven’t done that yet.”
The impact of monetary policy tightening tends to lag the real economy by about three to five quarters, Agbo-Bloua said. But he stressed that the excess savings accumulated during the pandemic created an additional buffer for consumers and households, while businesses were able to repair their balance sheets. That helps keep the labor market resilient, which could prolong the lag, he said.
trigger recession
So, to maintain credibility, Agbo-Blua said central banks — especially the Fed — will need to keep raising rates until a recession is triggered.
“We think a U.S. recession or slowdown should happen in the first quarter of next year because we think cumulative tightening will eventually have an impact, but it won’t go away,” he said.
“And then in Europe, we don’t think there will be a recession in the euro area because we’re seeing demand outpacing supply by 2 to 3 percentage points, so we’re seeing more of a slowdown than a recession.”
As for where the U.S. recession will start to spread, he said the recession is likely to “spread to corporate profit margins,” which are still hovering at record levels, through “a phenomenon of wage growth that essentially erodes corporate earnings.” near the level. “.
“The second point is that consumer spending patterns will also slow, so we think the combination of all these factors will ultimately lead to a slowdown,” he added.
“Then again, if you look at the current rate trajectory, it seems like we might be seeing a lot more tightening before that could happen.”
“Recession delayed, not canceled”
Nathan Thooft, co-head of global asset allocation at Manulife Asset Management, echoed that view, saying that while the economy is off to a better-than-expected start in 2023 and has largely avoided a technical recession so far, It’s more of a recession scenario being “delayed rather than canceled.”
“Tighter credit conditions and slower lending suggest that we have so far succeeded in delaying the coming recession, rather than avoiding it altogether,” Tufte said in the asset manager’s mid-year outlook on Friday.
“However, whether a recession actually occurs is far less important than how long we stay in a period of below-trend GDP growth.”
Global economic growth is expected to stabilize at around 2.5% this year and next, below the 3% threshold that, if broken, would herald a global recession, he said.
“If the forecast is correct, this means global GDP growth will be 15.2% below trend, which was last seen during the 2020 pandemic and earlier in the 1940s.”
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