As recession fears grow, central bankers’ loose lips could sink global economic recovery

It is crucial that central bankers are candid when it comes to assessing economic and financial risks that affect people around the world
However, policymakers must choose their words carefully, especially when the global economy is facing multiple shocks and markets are in a state of turmoil

Nicholas Spiro

Published: 10:00pm, 19 May 2022

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Bank of America’s monthly global fund manager survey was never intended to be a precise and accurate gauge of sentiment in financial markets. Yet, it does provide an indication of leading institutional investors’ views about the global economy and markets.

Among the most notable findings during the past several months is the dramatic shift in respondents’ perceptions of risk. As recently as February, investors believed the surge in inflation posed a bigger threat to markets than the prospect of a global recession.

However, the results of the latest poll, which were published on Tuesday, show respondents are now more concerned about a recession. In a sign of the extent to which confidence in the world economy has collapsed, expectations about growth have plummeted to their lowest levels since the survey began in 1994.

It is not just investors who fear an outright contraction in economic activity. Google Trends searches for the word “recession” worldwide have shot up to the level they were at when the Covid-19 pandemic erupted in early 2020.

More worryingly, leading policymakers are talking openly about the prospect of a recession. On May 5, Bank of England governor Andrew Bailey said he was unable to prevent inflation hitting 10 per cent this year and that Britain’s economy was about to experience a sharp downturn because of soaring energy prices.

Even US Federal Reserve chairman Jerome Powell, who insists his country’s economy is resilient enough to cope with higher interest rates, said last week it was unclear whether the Fed would be able to engineer a soft landing because of factors that were outside its control, notably renewed supply chain disruptions stemming from China’s “dynamic zero-Covid” policy.

To be sure, it is crucial that central bankers are direct and candid when it comes to assessing economic and financial risks that affect lives and livelihoods around the world. But while being candid is important, policymakers must choose their words carefully, especially at a time when the global economy is facing multiple shocks and markets are in a state of turmoil.

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The last thing investors, businesses and consumers need to hear right now is that central banks are losing confidence in their ability to avert a recession. There is enough doom and gloom these days without policymakers adding to concerns about a severe downturn. Central banks are supposed to be a source of stability, not an amplifier of uncertainty.

A loss of confidence can easily become self-fulfilling. If influential figures in business and finance talk about an impending recession, it makes people more nervous about the future and prompts them to cut back on spending and increase their savings. Countries can talk themselves into a recession.

It appears this is already happening. A report published by JPMorgan on Wednesday noted that US and euro zone stock markets are pricing in a 70 per cent probability of a global recession within the next 12 months. More tellingly, investors are piling into the safest assets, with holdings of cash at their highest levels since the September 11 attacks in 2001, according to the Bank of America survey.

The pervasive gloom is all the more troubling given that there is little indication that a recession is imminent. In the United States, household and corporate balance sheets are in strong shape, increasing the economy’s resilience.

The publication of data on Tuesday showed that the American consumer – the source of nearly 70 per cent of the country’s economic output – continues to spend. Retail sales were up 0.9 per cent month on month in the face of a squeeze on incomes from inflationary pressures and higher borrowing costs.

Even in the more vulnerable euro zone, which faces a more severe commodity shock stemming from Russia’s invasion of Ukraine, private sector output grew at its fastest pace in seven months in April. The lifting of most remaining pandemic-related restrictions has helped offset the slowdown in manufacturing activity.

Workers complete an electric car’s body at the plant of the German manufacturer Volkswagen in Zwickau, Germany, in February 2020. Photo: AP

China’s policy-induced downturn is more perturbing given the dramatic contraction in the economy last month, with retail sales plunging more than 11 per cent year on year. Yet, while Beijing’s zero-tolerance approach to the virus is proving ever more costly, it also makes more forceful easing measures more likely.

There are good reasons to be sceptical about the scale and efficacy of stimulus in China. However, the shock over the citywide lockdown of Shanghai – China’s financial hub and most populous city – could mark a turning point in policy. Even if it does not, signs that the wave of infections in Shanghai is subsiding and could pave the way for a gradual lifting of the lockdown augur well for sentiment.

While global growth is set to slow more sharply in the coming months as the pace of monetary tightening accelerates and panic starts to creep into markets, a full-blown recession is not inevitable. Policymakers have a duty to be frank with the public. Yet, they of all people should know there is a fine line between candour and alarmism.

Nicholas Spiro is a partner at Lauressa Advisory