[Domino Tightening] "Even Ultra Pigeons Have Turned Away" 75% Chance of Global Recession

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Seulgina Jo, Reporter Hyunwoo Lee] "Even the ‘ultra-dovish’ have turned away."

Right after the U.S. Federal Reserve's (Fed) giant step, the market is evaluating that the ‘domino tightening’ has begun in earnest as Switzerland, which had long maintained a quantitative easing policy, suddenly raised interest rates. Because the sharp interest rate hike in the U.S. could lead to capital outflows and a surge in exchange rates, the tightening clocks of major countries also seem to be accelerating. The warning signs of a global recession have also grown louder. Loomis Sayles has estimated the probability of a global recession at 75%.

◇Domino hikes by the UK, Switzerland, etc. right after the US giant step

On the 16th (local time), the Swiss National Bank (SNB) raised its benchmark interest rate by 0.5 percentage points from -0.75% to -0.25%. Contrary to expectations of a freeze, this was the first rate hike in 15 years. Thomas Jordan, SNB Governor, stated, "We cannot underestimate the risk of high inflation," and added, "Further rate hikes are not ruled out."

In particular, this decision surprised the market because Switzerland had been part of the so-called ‘ultra-dovish’ camp that maintained quantitative easing despite the tightening moves of neighboring countries. This is interpreted as a move to respond to exchange rates and inflation following the Fed’s high-intensity tightening and the European Central Bank (ECB) announcing a rate hike in July. According to AFP, the SNB, known as a ‘major player in the global asset market,’ is investing over $1 trillion (about 1,293 trillion KRW), equivalent to 140% of Switzerland’s annual GDP, in the global financial market.

On the same day, the Bank of England (BOE) also raised its benchmark interest rate by 0.25 percentage points to 1.25%. Through five consecutive hikes, the UK’s interest rate rose to the highest level since January 2009. The BOE is expected to raise rates by another 0.5 percentage points in August. The Hungarian central bank also raised its one-week deposit rate by 0.5 percentage points.

South Korea is also expected to hasten rate hikes amid expectations that the interest rate inversion with the U.S. is imminent. The New York Times (NYT) reported, "Due to ongoing war and high inflation, interest rates are rising worldwide."

◇High interest rates hit... concerns over recession grow

The problem is the impact these domino tightenings may have on the global economy. High inflation, high exchange rates, and high interest rates are hitting, and there is a possibility of a financial crisis, especially in countries with weak economic resilience. Also, the U.S. interest rate hikes, which influence global monetary policy, could lead to capital outflows from emerging markets.

Gabriela Santos, JP Morgan Global Market Strategist, said, "Central banks of various countries are more hawkish than expected," adding, "This increases the probability of a recession by the end of this year or early next year." Andrea Disenso, Vice President of Loomis Sayles, predicted a 75% chance of a global recession.

In the U.S., where the recession debate has been intensifying recently, economic indicators already show weakness. The newly released May housing starts fell 14.4% from the previous month, marking the lowest level in 13 months. As the impact of rising interest rates takes hold, the overall construction industry is also sharply contracting. The Philadelphia Federal Reserve Bank’s manufacturing activity index for June turned negative at -3.3, indicating contraction.

Additionally, concerns about a cooling real estate market have been raised as mortgage rates soared due to recent Fed rate hikes. According to the Wall Street Journal (WSJ), the 30-year fixed mortgage rate in the U.S. reached 5.78%, the highest since November 2008. It jumped 0.55 percentage points in just one week. Mike Fratantoni, Chief Economist at the Mortgage Bankers Association (MBA), expressed concerns about the real estate market, saying, "Housing demand has dropped quite sharply."

Amid recession fears, the Dow Jones Industrial Average at the New York Stock Exchange (NYSE) fell below the 30,000 mark. This is the first time in one year and five months since January last year that the Dow closed below 30,000. The S&P 500 and Nasdaq indices also closed down 3.25% and 4.08%, respectively.

◇South Korean economy and companies also inevitably hit

The global economic slowdown inevitably impacts South Korea’s economy, which has a high export ratio. The sharp drop in stock prices of domestic companies such as Samsung Electronics, Naver, and Kakao on the 17th is interpreted as reflecting uncertainty in business conditions due to tightening and the global economic recession.

Lee Seungwoo, Head of Research Center at Eugene Investment & Securities, explained, "Rising interest rates, which are increasingly high, will eventually accumulate and likely burden the global economy more from the second half of this year," adding, "So far, the focus has been on demand slowdown, but over time, doubts about companies’ investment plans are likely to grow."

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