MacroscopeAs 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

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US Federal Reserve chairman Jerome Powell testifies before a US Senate committee on July 15, 2021. Powell recently said it was unclear whether the Fed would be able to engineer a soft landing because of factors outside its control. Photo: TNS

Published: 10:00pm, 19 May 2022Updated: 10:58pm, 19 May 2022

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.