Global Economy Poised For A Slowdown – What Can Reverse The Trend?

The business cycle that started in 2020 is already showing signs of weakness as economic figures around the world are not encouraging. Even the USA, the largest economy in the world, posted a negative GDP print during the first quarter of the year, reinforcing the fact that cross-currents are no longer supportive of a long expansion like the prior one.

This concerning slowing is not limited to the developed nations. Despite a bull market in commodities, emerging markets, which should have benefited from this trend, are now coping with double-digit inflation. The focus now is on taming that inflation down, instead of stimulating the economy.

Inflation and uncertainty weigh on the economy

Fears related to a stagflationary environment are beginning to be voiced, and even though officials continue to send reassuring messages to the public, actual figures show that inflation is much higher than GDP growth. This erodes the standard of living of the middle class, prompting people to cut back on spending and to direct their capital to basic necessities like food, energy, gas, and other utilities.

Analysts believe that high inflation is one of the main reasons why the global economy is no longer showing signs of strength. On top of that, it prompts policy makers to act in reverse, putting economic growth in second place.

global economy and the war in Ukraine

Another aggravating factor is the war in Ukraine that’s still lingering, keeping commodity prices elevated. Ukraine and Russia are two of the largest exporters in the world, and with the end of this conflict nowhere in sight, nations dependent on imports are forced to look for other sources, squeezing supplies and raising prices.

Less fiscal and monetary impulse

Since the 2008 global financial crisis, a low interest rate in environment and government spending have been acting as a tailwind for the economy. Growth has not been linear but this support favored one of the longest expansions on record.

Now that governments can no longer afford to continue on this path, reducing fiscal and monetary stimulus, there is growing concern that the global economy will continue to weaken further until conditions favor a new wave of government intervention.

Coupled with economic concerns, the financial markets are definitely showing signs of stress. Those who are regularly trading forex face a relatively volatile market. Monetary policy divergences between the West and the East favor capital shifts, which might also impact economic activity, albeit with a certain lag.

China recovery – the only hope?

While growth potential remains weak in advanced economies, hopes are tied once again to China. For now, the country is sticking to its zero COVID policy, which keeps economic activity subdued and supply chain disruptions persistent.

Big cities like Shanghai have been under lockdown for weeks in a row, yet later this year, China might be forced once again to embark on a new round of stimuli, in order to keep economic expansion in check. Nevertheless, the need to get the wheels of the Chinese economy rolling faster may have a positive impact on the global economy – but it is too soon to tell.

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