eBusiness Weekly
Dr Keen Mhlanga
According to current economic estimates, if inflation continues to rise, so increases the likelihood of a recession. That implies more layoffs, fewer employment and higher interest rates may be on the way.
Following a Bloomberg survey of analysts in June 2022, the median risk of a recession in the following 12 months is 47,5 percent, up from 30 percent in June.
Inflation is a measure of an economy’s rate of rising prices for goods and services. It may have a detrimental effect on society if it leads to higher costs for fundamental needs such as food. Inflation may occur in almost any product or service, including both need-based costs like housing, food, medical care, and utilities and want-based spending like cosmetics, vehicles, and jewellery. When inflation becomes common across an economy, the prospect of additional inflation becomes a major concern in the minds of both consumers and companies.
The banking industry’s growth rate and capital adequacy are often regarded as leading indications of the global crisis in developed nations. On the other hand, it is also established that inflation and industrial development, in addition to economic growth and bank capital sufficiency for emerging economies, are acknowledged as indicators of the financial crisis.
Inflation in the United Kingdom reached a new 40-year high in July, as skyrocketing food and energy costs exacerbated the country’s historic strain on consumers. According to the Office for National Statistics, the consumer price index grew 10.1 percent year on year, above a Reuters consensus projection of 9,8 percent and rising from 9.4 percent in June.
Following a promising rebound in 2021, developments in 2022 were progressively bleak as threats began to materialise. Global output fell in the second quarter of this year due to slowdowns in China and Russia, while US consumer spending fell short of estimates. Several shocks have hit a world economy already weakened by the Covid-19 pandemic: higher-than-expected global inflation, particularly in the United States and major European economies, causing tighter financial conditions; a worse-than-expected slowdown in China, reflecting Covid-19 outbreaks and lockdowns; and additional negative spill overs from the Ukraine war.
Food and energy prices, as well as residual supply-demand imbalances, have pushed global inflation up to 6.6 percent in advanced nations and 9.5 percent in emerging market and developing economies this year, representing 0.9 and 0.8 percentage point revisions, respectively. Disinflationary monetary policy is anticipated to bite in 2023, with global production expanding by only 2,9 percent.
Growth is expected to decrease from 6.1 percent last year to 3,2 percent in 2022, which is 0,4 percentage point lower than the April 2022 World Economic Outlook. Lower growth earlier this year, less consumer spending power, and tighter monetary policy all contributed to a 1,4 percentage point negative revision in the United States. Further restrictions and a worsening real estate crisis in China have caused growth to be lowered down by 1,1 percentage points, with significant worldwide ramifications. Significant downgrades in Europe reflect spill overs from the Ukraine crisis and tighter monetary policy.
The risks to the forecast are mostly negative. The war in Ukraine could result in a sudden stoppage of European gas imports from Russia; inflation could be more difficult to bring down than expected, either because labour markets are tighter than expected or inflation expectations are unanchored; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed Covid-19 outbreaks and lockdowns, as well as a further escalation of the property sector crisis, could further suppress Chinese growth. A credible alternative scenario in which risks materialise, inflation increases more, and global growth falls to around 2,6 percent and 2,0 percent in 2022 and 2023, respectively, would place growth in the lowest 10 percent since 1970.
Lebanon’s annual inflation rate slowed to 210,08 percent in June 2022, down from a three-month high of 211,43 percent in May, as inflation eased for most components: food and non-alcoholic beverages (332.35 percent vs 363.78 percent), transportation (462.40 percent vs 515.36 percent), furnishings, household equipment, and routine maintenance (159.50 percent vs 182,35 percent). Meanwhile, costs for housing and utilities (132,38 percent vs 110,13 percent) and health care have continued to grow (492,20 percent vs 468,27 percent). Consumer prices jumped 9,23 percent in June, the biggest in six months, after rising 7,85 percent the previous month.
Argentina’s annual inflation rate increased to 71 percent in July 2022, the most since 1992, up from 64 percent in June and above market estimates of 70,8 percent. The development of accurate economic crisis early-warning indicators is a popular issue in field of economics. Identifying repeating patterns or combinations of macroeconomic indicators is critical for making appropriate policy adjustments to avoid a coming disaster.
In light of the findings, it is suggested that developed countries monitor the economic growth rate and the capital adequacy ratio of banks on a regular basis to determine whether they are at danger of a financial catastrophe. Furthermore, it is advised for developing countries that the inflation rate be controlled on a regular basis and that they identify essential activities to reduce the inflation rate.
With rising prices continue to compress living standards throughout the world, governments should prioritise controlling inflation. Tighter monetary policy will undoubtedly have significant economic consequences, but postponing it will only worsen them. Targeted fiscal assistance can help soften the impact on the most disadvantaged, but with Government finances already tight due to the epidemic and the requirement for a disinflationary general macroeconomic policy stance, such initiatives will need to be countered by higher taxes or decreased government spending. Tighter monetary conditions will also have an impact on financial stability, necessitating the careful use of macro prudential instruments and necessitating debt-resolution framework adjustments.
While inflation provides minimal benefit to consumers, it can provide a boost to investors who own assets in inflation-affected areas. Those who own shares in energy businesses, for example, may see their stock prices climb if energy costs rise.
Some businesses benefit from inflation if they can charge more for their goods as a consequence of increased demand. If the economy is doing well and there is a great demand for housing, home-building businesses can charge higher prices for selling homes.
In other words, inflation may provide firms more pricing power and boost their profit margins. If profit margins are expanding, it suggests that the prices corporations charge for their products are rising faster than manufacturing expenses.
Furthermore, company owners might withhold goods from the market on purpose, causing prices to increase to a beneficial level. Companies, on the other hand, might be harmed by inflation if it is caused by an increase in manufacturing costs. Companies are jeopardised if they are unable to pass on rising expenses to customers in the form of higher pricing. If overseas competitors, for example, are unaffected by rising manufacturing costs, their prices will not need to climb.
Dr Keen Mhlanga is a global financial expect, key note speaker, investment advisor with high skills in digital banking, corporate and development finance. A dedicated, hardworking financial genius and business magnate. He is the executive chairman of FinKing Financial Advisory. Send your feedback to [email protected], contact him on 0777597526.
