By Jonathan Cable, Lika Kihara and Dan Burns
LONDON / TOKYO / NEW YORK (Reuters) – The global economy is increasingly likely to be headed for a serious slowdown, as the highest rate of inflation in a generation prompts central banks to pull back aggressively from the ultra-loose monetary policy adopted during the pandemic to support growth. The data showed on Friday.
Business activity in the United States, the world’s largest economy, contracted for the first time in nearly two years this month. On Friday, they showed activity in the eurozone fell for the first time in more than a year, and growth in the UK hit an 11-month low.
More dominoes are expected to fall, as the Japanese government is expected to sharply cut its forecast for domestic growth.
Meanwhile, strict China-imposed lockdowns due to the Covid-19 virus and Russia’s invasion of Ukraine have disrupted global supply chains that have yet to recover from the pandemic.
In the US, the PMI decline was the fourth in a row, driven by weakness in the services sector, which contracted enough to offset moderate industrial growth.
With a reading below 50 indicating a decline in business activity, the report will spark debate over whether the US economy is back in – or close to – recession after rebounding sharply from a slowdown in early 2020, at the start of the pandemic.
“Preliminary PMI data for July indicate a worrying deterioration in the economy,” Chris Williamson, chief business economist at Standard & Poor’s, said in a statement. “Except in the months of pandemic lockdown, production is declining at a rate not seen since 2009, amid the global financial crisis.”
In the eurozone, business activity unexpectedly contracted this month due to a sharp slowdown in manufacturing and near sluggish growth in the service sector, as rising costs slashed consumers spending.
The European Central Bank said on Friday that euro zone firms continued to report rising inflationary pressures and an acceleration in wage increases, even as the overall outlook for growth became more uncertain, based on a survey of 71 large firms.
Official data showed inflation in the currency bloc reached 8.6% last month, and on Thursday the European Central Bank raised interest rates higher than expected, underlining that concerns about runaway inflation now outweigh concerns about growth.
The Federal Reserve, which is battling the highest rate of inflation in 40 years, is expected to make another sharp rate hike of 75 basis points at its meeting next week.
A Reuters poll showed a 40% chance of a US recession next year and 50% within two years, a significant change from the June poll.
China and Japan remain exceptions in keeping monetary policy loose, a sign that their economies – the world’s second and third largest – lack the strength to offset weaknesses elsewhere.
China slowing down
Concerns about a global slowdown overshadow recovery prospects in Asia, with slowing growth in manufacturing activity in Japan and Australia, keeping pressure on policymakers to continue supporting their economies as they tighten monetary policy to fight inflation.
China’s economic growth slowed sharply in the second quarter, weighed down by a widespread Covid-19 lockdown and pointing to continued pressure in the coming months on the global landscape.
The slowdown in the world’s second-largest economy and the fallout from strong monetary tightening by central banks forced the Asian Development Bank to cut its growth forecast for the region on Thursday.
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