A well-known story by Gabriel García Márquez tells the story of a woman who wakes up at breakfast with a premonition that “something very serious is going to happen to this town” to her two children. During the day, the impression moves from rumor to shared certainty and turns into mass panic, after which residents flee in fear.
(You can also read: Between risk and uncertainty / Analysis by Ricardo Ávila)
Finally, as the houses burned by their owners burn so that illusory misfortune does not spread and immigration begins, the prophetic lady concludes: “I said something very serious was going to happen, and they told me I was crazy.” This closes a prediction that in itself was the reason why it happened.
While observing the course of economic events these days, those who remember the writing of the Colombian Nobel Prize and point out that the world is heading towards a self-fulfilling prophecy are not missing. From this perspective, with so much talk of declines, the planet is heading towards a major slowdown.
The data seem to justify them. Federico Manicardi of JP Morgan bank, The number of articles mentioning the word recession, defined as two consecutive quarters of negative growth, has increased 10-fold in recent months. and they are approaching the maximum level at the beginning of 2020, when the pandemic started.
Hence the reaction to news that is good at first glance. According to the U.S. Bureau of Labor Statistics, the world’s largest economy saw an increase of 372,000 people in employment last month, a figure that far exceeded analysts’ expectations.
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And difficulties are not part of the plot. Unlike the original story, this time the dangers are real and it’s the order of the day.
To begin with, inflation is rising rapidly in nearly all latitudes, with a few exceptions like China. The global average, which was close to 3 percent a year ago, is now approaching 9 percent. In the case of the most developed countries, this figure is the highest in the last forty years.
Understanding why price increases accelerated requires going back to the bottlenecks caused by covid-19 at that time. Contagions caused production declines in more than one sector, while aid programs initiated by governments prevented consumption from falling.
(Don’t stop reading: Squeeze but don’t drown / Analysis by Ricardo Ávila)
As a result, demand remained strong while supply of various goods experienced tightness. The gap became even more pronounced as mobility restrictions began to be lifted. However, it was believed that these tensions would be temporary until the end of 2021. The Russian invasion of Ukraine dramatically changed the landscape as it increased shortages of grain, hydrocarbons and minerals.
Faced with a buildup of prints, he had no choice but to dust off his famous cookbook. Many central banks have begun to raise the cost of money, which will eventually make credit more expensive and lead people to delay their purchasing decisions.
Ideally, moderation in consumption will bring supply and demand back into balance and everything will return to normal. This is the long-awaited “soft landing” that experts talk about.
Unfortunately, in practice this is not so simple. To begin with, not all markets settle at the same time, and not every individual situation is the same.
Even if it looks like it was at the start of a fire, the way to extinguish each source of fire varies and is subject to the specific conditions of the terrain and wind. It should also be taken into account that the secondary effects of the worsening situation in certain areas may be isolated in others.
More precisely, Argentina or Turkey are having very bad times on this front, but it is more serious that the US finds it difficult to contain the famine., because the decisions made by its officials have repercussions in other countries. In addition to making debt more expensive, higher interest rates affect perceptions of risk and prompt capital to seek safe havens, starting with dollar-denominated assets.
For this reason Those who say that a depreciated peso doesn’t really matter are mistaken. The value of imported raw materials, as well as intermediate goods and finished products, affects the standard of living of the population in general.
As if that wasn’t enough, Colombia also has a real inflationary headache felt most acutely by those at the bottom of the income pyramid. As the Dane announced this week, the annual increase in the family basket was 9.7 percent at the end of June, but this index is almost two points higher for the lowest strata.
Turning to the US economy, there are a few signs that things are not quite right. Aside from the decline in retail sales in May, consumer confidence in June was at its lowest level since it began being measured in the past century.
Similarly, the real estate market is in stagnation as rising mortgage payments and loss of buyer appetite have led to the cancellation of new construction projects. By contrast, stocks suffered their worst first half since 1970, down an average of 19 percent.
So why do jobs and wages continue to rise in value? Professional services or restaurants and tourism-related fields continue to expand, which could help ease the blow in the North American example.
The future of Europe is much more complex. Unsettled by military support for Ukraine, Vladimir Putin warned last week of the damage that could be done to the Old Continent if he soon cuts off natural gas supplies and oil shipments.
While still dead calm, few observers would dispute that Europeans are facing a recession directly related to the cost of energy. If there is a power delivery that will take place as soon as temperatures start to drop in the last quarter, the road will be more complex..
With such a threat hanging over us, we’ll see if the community bloc’s central bank will raise interest rates in September. It is clear that the euro is currently one of the main victims of the situation, as it has lost 14 percent against the dollar in the last twelve months and traded one-by-one on Friday.
Primary goods prices are at the forefront among the ongoing unknowns. Copper, which has recently reached record highs, is down 20 percent from levels at the beginning of the year.
At the same time, basic foods such as corn and wheat are far from the points reached in March and May. For major grain importers, this is a very welcome relief, which translates into a slight change in the inflation trend..
When it comes to oil, there are visions for every taste. While there are those who believe the economic slowdown will translate into lower oil consumption, others say China gained strength after the April restrictions to quell the pandemic on its territory.
The most extreme insists that a squeeze on the bid on behalf of Russia is imminent. Under this perspective, The barrel’s drop below $100 last week would be a temporary anomaly as a significant recovery seems inevitable..
Regardless, shocks aim to become the norm, not the exception, in the coming months. The combination of economic difficulties with a particularly complex geopolitical reality leaves little room for optimism.
To sum it up in one sentence, tough times are coming for many because global growth will be lower and interest rates will continue to rise. A group of emerging countries in Latin America, Africa and Asia, along with most developed countries, will enter a recession that will hit those on the other side of the Atlantic harder than North America.
Others will win if they know how to play their cards right. Colombia may be in this group, but that will depend on whether the new government knows how to maintain the confidence of foreign investors as well as consumers and the private sector.
So far the process is not going well at all. Beyond the messages of moderation from the Petro administration and the composition of the cabinet, which will take office on August 7, headed by a trade-savvy finance minister, there are signs that the perception of political risk is affecting us.
To begin with, it is known that while most currencies have depreciated against the dollar, depreciation is more extreme in the case of the peso, something that makes foreign debt more expensive to pay off and puts pressure on the family basket. It is no less worrying that credit risk, measured by what are known as five-year Credit Default Swaps, is rising and is now comparable to that of Brazil, while it was comparable to that of Mexico months ago. .
Then, the next team needs to understand that the environment is harsh and that the tolerance for experiments with dubious results is much lower. In this sense, some consistency in messages would be very helpful, starting with clarifying the objective of fiscal responsibility and the seriousness of meeting government commitments.
Otherwise, there will be voices that “something very serious is going to happen to this town”. In order for the disastrous prophecies in the García Márquez story not to come true, it will be necessary to show with facts and good policies that Colombia will manage to come out of this difficult world situation gracefully despite everything.
RICARDO AVILA PINTO
WEATHER SPECIFIC
Source: Exame