Although the interest rate hikes by many central banks, including the Federal Reserve, are coming to an end, the most painful moment may not yet come. As the cost of fighting inflation becomes apparent, the hardest hit may be...
The Wall Street Journal said that a series of interest rate hikes by central banks around the world seems to be coming to an end, but the economic costs of fighting inflation are just beginning to emerge, and there are increasing signs that Europe may be one of the countries hardest hit.
That assertion was reinforced by a survey published on Friday showing the European economy contracted in the three months to September.
Many central banks have signaled that interest rates should now be high enough to bring down inflation. Of the 12 central banks that announced interest rate policy decisions last week, eight kept their key rates unchanged, including the Federal Reserve and the Bank of England.
The round of rate hikes is unprecedented in breadth, size and speed. Policymakers have raised borrowing costs by more than in any similar period before.
Those rate hikes are designed to slow demand and the labor market and, ultimately, economic growth, thereby cooling inflation. But their effects will be felt long after the last rate hike, and the extent of the weakness in the job market and economic growth will largely determine how long the central bank waits before starting to move toward rate cuts.
Many central banks have signaled they are unlikely to cut benchmark interest rates until 2024 or later, but that could change if the economy slows more than expected. That risk appears greater in Europe than in the United States.
“Maybe the Fed is doing too much to fight inflation, but Europe has caught up to a point where the economy can’t stand it,” said Dario Perkins, an economist at T.S. Lombard.
The global economy cooled in the three months to June, with few signs of a rebound outside the United States, with Europe looking most likely to contract across the board. As the first anniversary of the conflict between Russia and Ukraine passes, Europe has just weathered the impact of the conflict on energy and food prices, but the headwind of rising interest rates may be too much of a challenge.
The European manufacturing and service PMIs for September released earlier showed that economic activity in Europe declined again, indicating that the region's economy shrank in the three months ending September.
The economic outlook also deteriorated, with new orders falling at the fastest rate since November 2020. France, whose economy has helped drive eurozone growth as Germany stagnates, saw the biggest drop in activity in September.
The survey showed Germany's gross domestic product (GDP) would fall by around 1.6% on an annualized basis, said Hamburger Bank, which hosted the poll.
"The fact that the manufacturing sector has been underperforming for quite some time but the services sector was the main reason for the decline in new orders suggests that weak demand in the euro area is becoming more widespread," said Bert Colijn, group economist.
In Britain, a survey of purchasing managers showed the biggest fall in activity since March 2009, excluding the months following the outbreak of the coronavirus. Analysts said the survey pointed to economic stagnation in the three months to September, but also suggested the economy would not pick up in the final three months of the year as they had previously expected.
In contrast, purchasing managers' surveys showed Australia's economy returned to expansion and Japan's economy continued to grow.
In the United States, an S&P Global survey of purchasing managers showed continued strength in the job market but that the overall economy was cooling after strong growth this summer.
In the United States, the survey's employment component rose to its highest level since May. But new orders for both goods and services fell, output stagnated as manufacturers and service providers saw weaker demand, and business confidence fell to a nine-month low.
Some central banks continued to raise their key interest rates, though many more refrained from doing so. The European Central Bank, the Swedish Riksbank and the Norges Bank all announced rate hikes in their decision-making this month. Economists expect these to be the last of their rate hikes.
However, consumer prices continue to rise rapidly, albeit at a slower pace than in the second half of 2022. The job market remains tight, with unemployment rates near historic lows in many rich countries. Given this, many central banks have signaled they will not soon follow Brazil’s lead in cutting benchmark interest rates.
"Globally, headline inflation continues to cool, but food price inflation remains elevated, oil markets have tightened noticeably and core inflation still looks tough," said South African Reserve Bank Governor Lesetja Kganyago when announcing unchanged interest rates last Thursday. "Sticky inflation means that average interest rates across major economies will remain high."
