During a panel discussion in Amsterdam in May, Jerome Powell, chairman of the Board of Governors of the Federal Reserve System said that his confidence in curbing inflation was “not as high as it was,” after the Producer Price Index (PPI) came in higher than anticipated.
Jamie Dimon, chairman and CEO of JPMorgan Chase, stated at the JPMorgan Global China Summit in Shanghai that a ‘hard landing’ for the US cannot be dismissed. He mentioned to CNBC that the most undesirable scenario for the U.S. economy would involve stagflation, characterized by escalating inflation alongside sluggish growth and high unemployment, adding that there might still be room for interest rates to increase slightly.
The latest data from the US Labor Department points to a 0.5% uptick in the PPI for April, a rebound from the 0.1% dip in March. Earlier, the US Commerce Department said consumer price index witnessed a 3.4% year-on-year increase in the first quarter, much higher than the 2% target.
These unexpectedly high figures, characterized as surpassing expectations, have diminished any hoped for rate cuts within the year, further disappointing market expectations following multiple dashed prospects for rate cuts since the start of the year. Concerns have arisen about the possibility of no rate cuts or even further rate hikes amidst the ongoing “higher for longer” predicament.
Ali Farid Khwaja, Chairman of KTrade Securities, a prominent investment firm in Pakistan, noted that the current scenario would notably shift dynamics due to interest rates already being at a 23-year high. He highlighted that, presently, the repercussions of high interest rates have not impacted small business owners and real estate owners, as their existing debt contracts are not subject to re-pricing. However, Khwaja cautioned that once re-pricing takes effect later this year, it will significantly impact consumers, potentially leading to a recession extending into 2025.
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Signs of Economic Tension
Hiring Slowdown amidst Rising Costs
Recent statistics from Challenger, Gray & Christmas, Inc. indicate a slowdown in hiring among U.S. companies in April, with around 9,000 new hires announced, marking the lowest figure for the month since 2013. Andrew Challenger, Senior Vice President at the firm, cautioned that as labor costs continue to escalate, companies may become more hesitant to expand their workforce, potentially necessitating further cutbacks. He likened the subdued hiring activity in April to a possible calm before a storm of economic challenges.
Small and medium-sized enterprises will face the brunt of the “compounding impact” of elevated inflation in the broader market. According to Ali Farid Khwaja, as inflationary pressures accumulate, leading to heightened costs, both consumers and businesses may begin to curtail spending and hiring, signaling the looming threat of a recession. Looking ahead, Khwaja warned of the potential repercussions for homeowners seeking to refinance their mortgages, anticipating the challenges posed by high interest rates, such as a 7% rate, in the coming year. While Khwaja does not anticipate an immediate rate hike, he emphasized the escalating risks to the overall economic system if rate cuts are further delayed.
De-globalization
Khwaja highlighted the challenges associated with controlling inflation in the face of protectionist policies, emphasizing the detrimental impact of reduced trade, increased tariffs, and rising fuel prices over the past five years. He underscored how these factors have contributed to escalating inflation rates, disrupting the previously harmonious balance between low inflation and robust economic growth driven by global trade benefits. Khwaja warned against using economic policies for political motives, cautioning that such actions could exacerbate inflation and widen the gap between the affluent and the disadvantaged, ultimately straining the country’s economy and fostering social and political unrest.
Bridgewater Associates founder, Ray Dalio, echoed these concerns, suggesting that mounting government debt and widening wealth disparities could push the nation perilously close to civil unrest.
Similarly, Dr. Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute (SDPI), noted that such economic challenges would present significant hurdles for future governments, undermining policy stability and predictability. He emphasized the daunting task facing the next administration in meeting voters’ economic expectations, suggesting that a reevaluation of the real value of the USD could be among the first steps taken after the election.
Impact of Prolonged US Inflation
As inflationary pressures in the United States persist, the effects ripple across the globe, with developing nations bearing the brunt of the economic strain. Ali Farid Khwaja highlighted the challenges posed by maintaining higher interest rates to attract secondary capital, particularly for Asian markets, exacerbating trade issues on a global scale. The escalating costs of debt servicing are especially burdensome, leading to historic lows in currencies across Asian markets such as Malaysia, Indonesia, Thailand, and India, prompting interventions by central banks to stabilize their currencies.
The repercussions are not limited to developing nations, as the US itself grapples with mounting concerns over a potential return to 1970s-style stagflation amid a slowing economy and stubborn inflation. Dr. Suleri outlined two potential courses of action for the US government, suggesting that depreciating the value of the US dollar against other major currencies may be an undesirable step for any outgoing administration. Alternatively, failing to address trade competitiveness issues could further erode the US position in global trade against competitors such as China, the EU, and Japan.
In conclusion, the persistent inflation in the US presents a complex challenge with both domestic and global ramifications. Policymakers face the delicate task of balancing interest rates to control inflation without stifling economic growth. The impact of these decisions is far-reaching, affecting not only the US economy but also the global trade landscape, particularly in developing markets. As the world navigates this turbulent economic period, the importance of strategic, well-informed policy decisions cannot be overstated. The path forward requires careful consideration of both short-term impacts and long-term consequences to mitigate the risk of prolonged economic instability.
By Asif Noor Muhammad.
Founder of Friends of BRI Forum and Advisor to Pakistan Research Center, Hebei Normal University, China & Co-Founder, Alliance of China-Pakistan Research Center.
