Macroscope | Recession and inflation fears give way to a crisis of confidence in economic policymaking

As major economies continue to grapple with high prices while fending off a slowdown, the effectiveness of central banks and governments is being called into question

At the heart of the brutal sell-off in markets is a lack of confidence in global policymaking

Reading Time:3 minutes

Stock market information is displayed on a TV at the Nasdaq MarketSite in New York on Wednesday. Ineffective policies have exacerbated market confusion. Photo: Bloomberg

Published: 1:30am, 17 Jun 2022Updated: 2:30am, 17 Jun 2022

It should be clear to any investor by now that something profound has changed in global markets since the beginning of the year. While phrases such as “a new paradigm” and “regime shift” are bandied about, a far simpler explanation for the dramatic declines in asset prices is pervasive uncertainty.

At the start of the year, the overriding concern was persistently high inflation, exacerbated by the commodity shock stemming from Russia’s invasion of Ukraine and the renewed disruptions to global supply chains caused by extended lockdowns in China.

By early May, the panic over inflation had given way to mounting fears about a major slowdown, and quite possibly a full-blown recession. Having fallen behind the curve in controlling prices, leading central banks, in particular the US Federal Reserve, pivoted rapidly towards aggressive tightening, increasing the scope for a steep downturn.

Yet, no sooner did the market narrative shift to the risk of a recession than the inflation scare took hold again. The publication of data last Friday showing that prices in the US hit a fresh 40-year high of 8.6 per cent year on year last month has convinced investors that the stark choice facing policymakers is between losing control of inflation and severely damaging the economy.

To be sure, a soft landing – a policy-induced slowdown that averts a recession – is still possible, provided inflation peaks in the coming months and interest rates do not rise sharply enough to cause economic activity to contract.

However, not only are persistently high prices just as menacing as a severe downturn, the ability of central banks and governments to respond effectively to these twin threats is being called into question. At the heart of the brutal sell-off in markets over the past two months is a crisis of confidence in global policymaking.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Recession and inflation fears give way to a crisis of confidence in economic policymaking

Macroscope | Recession and inflation fears give way to a crisis of confidence in economic policymaking