Australia braces for a week of economic carnage as ominous clouds hang over global economy

There are now fears the world is teetering on the brink of a recession after horror new data from the US sent chills around the globe.

There are now fears the world is teetering on the brink of a global recession, after horror new inflation data from the US that has sent a chill through stock markets around the globe.

Australians who own stocks are probably glad it’s a public holiday today and the markets are closed after a difficult enough week last week.

But the pain is set to get even worse for the Australian economy after the US recorded the highest rate of inflation since 1981 — stoking fears the global economy is slowly falling into a recession.

While there may be a recess for Australia’s pain because of the Queen’s Birthday holiday today, it is anticipated the market will be hammered in the days that follow.

Investors Mutual portfolio manager Daniel Moore told The Australian he expects “significant falls” when the market reopens this week.

“The US market was down to 2.73 per cent on Friday, so the Australian futures are currently down 1.6 per cent and if you looked at the sector breakdown, nearly all sectors were down, on fears higher inflation will lead to higher interest rates which will cause a recession,” said Mr Moore, who looks after $5bn in funds.

“The economic outlook is pretty tough, with rising inflation and rising interest rates and investors are generally cautious and there’s a preference towards companies with more resilient earnings in tougher economic conditions.”

Australian shares are expected to take a hammering this week. Picture NCA Newswire/ Gaye Gerard.

Things were already looking sketchy on the Australian Stock Exchange after a week that saw a higher than expected cash rate rise.

As there’s little relief in sight as many economists expect the RBA to bump up interest rates by 50 basis points at their next meeting in July following a surprise 50 basis points hike this month.

Why are we facing a recession?

While inflation and interest rises are on the rise here in Australia, things are looking much worse in the US.

Its red-hot inflation rise is showing few signs of cooling, putting its Federal Reserve on track to continue its aggressive interest rate increases to help cool high prices that are challenging Joe Biden’s presidency.

The hoped-for signs of relief for American families did not materialise in May as consumer prices hit a new four-decade high, rising 8.6 per cent and topping what economists thought was the peak in March.

With Russia’s war on Ukraine continuing to pressure global fuel and food prices, and amid ongoing supply chain uncertainties due to Covid-19 lockdowns in Asia, analysts now say the expected easing of inflationary pressures will take much longer to materialise.

The US central bank already had signalled plans for more big increases in the benchmark borrowing rate this week and next month, but chances are rising that the Fed might have to be even more aggressive — which increases the risk the economy might tip into a recession.

The latest inflation report — the last major data point before the Fed’s policy meeting Tuesday and Wednesday — also douses hopes central bankers will be able to call a ceasefire in September ahead of key congressional elections, where Biden’s Democrats are widely expected to suffer damaging losses.

The US announced that consumer inflation rose to an 8.6 per cent annual rate in May, the highest in more than four decades. Picture: Michael M. Santiago/Getty Images/AFP

Prices continued to rise last month for a range of goods, including housing, groceries, airline fares and used and new vehicles, setting new records in multiple categories, according to the Labor Department data.

Energy has soared 34.6 per cent over the past year, the fastest since September 2005, while food jumped 10.1 per cent, and the cost of fuel oil more than doubled, jumping 106.7 per cent, the largest increase in the history of CPI, which dates to 1935.

The CPI surge “raises the probability of even more aggressive Fed rate hikes to tamp down on inflationary expectations,” said Mickey Levy of Berenberg Capital Markets If the policy-setting Federal Open Market Committee decides on a giant step — three quarters of a point rather than the expected half-point increase — it would be the first 75 basis point rate hike since November 1994.

Diane Swonk of Grant Thornton indicated such a move is possible. “They are behind the curve and eager to catch up,” she said on Twitter. “Fed has to reduce demand to meet a supply-constrained world. Ugly in many ways.”

Economists at Barclays are now calling for a 0.75-point increase, though Ryan Sweet at Moody’s says chances are low, and Karl Haeling at LBBW expects three more half-point hikes.

– with AFP