Rising Prices Push Even Europe to 'Austerity'... US CFO Says "Recession Approaching" [Era of Ultra-Austerity]

Christine Lagarde, President of the European Central Bank (ECB), is holding a press conference after a monetary policy meeting in Amsterdam, Netherlands, on the 9th (local time). The ECB announced that it would raise the key interest rate by 0.25 percentage points in July and raise it again in September. This is the first time in 11 years that the ECB has raised the key interest rate. 2022.6.10 [Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporter Lee Hyunwoo] Even Europe, which had been cautious despite the United States' consecutive 'big steps,' has drawn the 'tightening' sword due to the judgment that inflation has reached an uncontrollable level.

On the 9th (local time), the European Central Bank (ECB) announced an interest rate hike just one day before the release of the May Consumer Price Index (CPI), which can gauge the intensity of the U.S. Federal Reserve's (Fed) tightening. As major central banks simultaneously embarked on high-intensity tightening, fears of an economic recession grew stronger. Seven to eight out of ten chief financial officers (CFOs) of major U.S. companies predicted a recession would occur in the first half of next year.

◆ ECB Turns Hawkish, Announces July Rate Hike

At the ECB's monetary policy meeting that day, the market's focus was on the future interest rate path. The ECB announced that it would raise the current benchmark interest rate of 0% by 0.25 percentage points starting in July and raise it again in September. This would mark the first rate hike in 11 years.

In particular, it is considered very unusual that the ECB announced rate hikes over two upcoming meetings. Since the Southern European financial crisis in 2011, the ECB had continuously cut rates and maintained zero interest rates for about six years since March 2016. Even after the Bank of England (BOE) and the Fed began tightening one after another, the ECB maintained a dovish stance. However, with inflation soaring recently, it is interpreted that the ECB finally drew the tightening sword.

The ECB stated, "Due to the impact of the Ukraine situation, energy and food prices soared, causing inflation to rise significantly last month," adding, "The broadening and deepening of inflationary pressures is a serious challenge." The Eurozone's May CPI inflation rate reached a record high of 8.1%. By item, energy costs such as oil and natural gas rose by 39.2%. Food, alcoholic beverages, and tobacco prices also surged by 7.5%.

The ECB also clearly indicated that it would not hesitate to raise interest rates more aggressively to curb inflation. It left open the possibility of a big step of 0.5 percentage points at once, like the Fed. David Powell of Bloomberg said, "The ECB presented a clearer path than initially expected," and predicted, "To avoid shocks in neighboring countries' bond markets, gradual hikes will be made in September and October."

The ECB's move has heightened global tightening concerns. The market is closely watching the U.S. May CPI, which will be announced on the 10th, ahead of the Fed's Federal Open Market Committee (FOMC) meeting next week. Following 8.5% in March and 8.3% in April, an 8% range is expected again in May.

If the May inflation rate slows down, it could be seen as 'inflation having peaked.' On the other hand, if the May increase is larger than the previous month, the Fed's tightening stance is expected to strengthen further. There are also forecasts that even if U.S. inflation eases somewhat in May, it will surge again in June.

◆ Worries Spread That "Recession Will Come Next Year"

Warnings that high-intensity tightening will lead to a recession are pouring in. According to a CNBC survey of 22 major company CFOs, 77% of respondents said they expect a recession to occur in the first half of 2023. None of the CFOs believed the U.S. economy could avoid a recession.

More than 40% of CFOs cited inflation as the biggest external risk. Following that were Fed's monetary policy (23%), the Russia-Ukraine war, and supply chain concerns (14%) as major risks. Anna Stubnitska, a global economist at Fidelity, pointed out, "Too rapid an increase can cause a recession."

The International Monetary Fund (IMF) is expected to revise down its global economic growth forecast again in July this year. This would be the third time this year alone. Earlier, the World Bank (WB) also sharply lowered its global economic growth forecast to 2.9% this year and warned of the possibility of 'stagflation.' Larry Summers, a Harvard professor and former U.S. Treasury Secretary, predicted the probability of a U.S. recession next year to be over 80%. However, Janet Yellen, U.S. Treasury Secretary, attending a summit in Washington DC that day, acknowledged inflation concerns but drew a line by saying, "There are no signs of a recession."

In the CNBC survey, 77% of respondents predicted that the Dow Jones Industrial Average would fall below the 30,000 level. This would be a 9% drop from the current level and more than an 18% drop from this year's peak. On that day, the New York stock market closed down across the board due to tightening concerns. The Nasdaq index, which is sensitive to interest rates and centered on technology stocks, fell 2.75% compared to the previous session.

This content was produced with the assistance of AI translation services.