Robust economic data releases ease fears of a global recession

Last year, the Fed hiked its rates seven times, and the speed has been unmatched since the 1980s. In 2023, policymakers are taking a different approach by increasing rates at a slower and more deliberate pace. In February, the US central bank raised its rates by a quarter of a percentage point, lifting the Federal fund rates to 4.5-4.75 percent.

The prevailing US fund rates are the highest since 2007 and there are expectations that the US Fed still has room for three or more quarter-point rate hikes up its sleeve this year.

Earlier, during the pandemic period, the bank brought down its rates to near zero and launched stimulus programs in a bid to protect its pandemic-hit economy.

However, employment and inflation numbers would largely influence the Fed’s decision on further rate changes. As per recent data, US consumer spending increased by the most in nearly two years in January due to a surge in wage gains. Signs of accelerating inflation are raising fears that the Fed may continue hiking rates into summer.

The Fed’s rate hikes have helped to bring inflation down significantly from a summer peak, but it is still far away from the central bank’s target levels. The annual inflation rate in the US is 6.41 percent in January compared to 6.45 percent in December and 7.48 percent in the previous year. The long-term average of US inflation has stood at 3.28 percent.

However, the US job market posted robust growth in January and the unemployment rate decreased to its lowest level in more than 53 years. It shows jobs created in the US three times faster than the pre-pandemic pace since 2019.

The Fed’s recent move has cushioned the US currency and corrected by more than 9 percent from its twenty-year high hit last September. Earlier, the aggressive rate hikes skyrocketed the value of US currency which dampened global growth momentum.

To beat inflation, several other countries also lifted interest rates. This has adversely affected the global growth outlook and raised fears of a recession. In the world economic outlook published in January, the IMF predicted that global growth is projected to fall in 2023 and many economies would experience a recession this year.

Meanwhile, recession fears are now far and wide as many key economies show signs of recovery. In Europe, the euro area business activity is ticking higher in the first two months of the year. Falling energy prices, improving supply chains and a relatively mild winter have helped to prevent a major economic meltdown in the zone.

China’s economic activity also painted an upbeat picture. The recent soaring manufacturing and services activity data hints that the country is in full swing after the economy reopened from the pandemic restrictions. There are also expectations that the economy would continue to outperform in the coming months.

Anyhow, a combination of easing inflation and sustained economic growth would prevent the global economy from entering a recession.

The author, Hareesh V is Head of Commodities at Geojit Financial Services