Bank of Singapore on the Chinese and US economy: "US recession is a prerequisite for a fall in inflation"

• China could fall into a longer-term deflationary trap
• Recession is a prerequisite for US inflation to fall
• The Fed must keep interest rates high

China’s economy at a critical juncture

The economic situation in the Middle Kingdom has deteriorated significantly. The news and economic data that China has reported in recent weeks do not give much hope. The worry about deflation, record unemployment among Chinese youth and an imminent crash in the real estate sector are causing increasing unrest. Confidence in the Chinese economy and the Chinese leadership’s willingness to reform are increasingly suffering. Added to this are the risks of the foreign trade and foreign policy conflict with the USA. All of this leads to less local investment and a weak labor market, as ZDF explains in a report. dr Wan-Hsin Liu from the Kiel Institute for the World Economy told ZDF: “The structural problems and the associated challenges will also put long-term pressure on the country’s economic growth.” The chief economist at the Bank of Singapore, Mansoor Mohi-uddin, also explained in an interview with Bloomberg: “We do not believe that there will be a Lehman crisis in China because the banks are well positioned. But we are concerned chronic lack of demand persists, which could push China into a longer-term deflationary trap.”

BoS: US recession is a prerequisite for a fall in inflation

While the focus in the Middle Kingdom is on counteracting deflation, inflation is a problem in the USA. Mohi-uddin says the US needs a recession to bring inflation back to the Fed’s 2 percent target, he said in the Bloomberg interview. “We are very much opposed to the view that a soft landing, a benign scenario, will bring inflation back to 2%.” His opinion is in clear contrast to statements made by Fed Chairman Jerome Powell, who does not expect a recession in the US. As Bloomberg explains, while there is still general hope for an end to tightening in the US, 48 percent of investors still expect another rate hike going out in November. “We believe the Fed has completed the cycle of rate hikes. There is a clear risk that the Fed will need to return to the negotiating table if inflation numbers hold up. Maybe not this September meeting or even November or December. In For now, markets are worried about this risk, so any slightly stronger-than-expected data will trigger a reaction, both in the US dollar and in Treasuries. […] And I’m concerned that core inflation will just get stuck between 3% and 4%,” Mohi-uddin said. The Fed would need to slow down much more to bring inflation back to 2%. It doesn’t have to be a deep one recession as experienced in 2008. However, he believes that a recession is more likely than just a soft landing, and soon.

Fed must keep interest rates high

Later in the interview, Mohi-uddin goes on to explain that, albeit to the surprise of investors, the Fed must keep interest rates at the high levels they currently are until possibly June next year. However, this will hurt growth in the long term and ultimately plunge the economy into recession. And the price of oil is also a reason to keep interest rates high. This is getting closer and closer to the US$ 90 per barrel mark. “So if the oil price is to be sustained, the Fed will be forced to keep interest rates higher for longer, which will then pull growth back down over time,” said the BoS chief economist.

Editorial office finanzen.net