Global economy in danger: stagflation and geopolitical risks are growing!

Global economy in danger: stagflation and geopolitical risks are growing!

The current economic situation is increasingly characterized by geopolitical conflicts and stagnating growth rates, as the annual survey of central bank reserve managers by the major Swiss bank UBS shows. Loud South Tyrol News Respondents see geopolitical conflicts as the greatest risk to the global economy. Last year, most expected a gentle economic slowdown, but now stagflation is seen as an equally likely scenario. Stagflation describes a phase in which high inflation is accompanied by stagnant growth and a weak labor market.

The results of the survey are particularly worrying: 74 percent of reserve managers rate trade conflicts as the greatest risk, while 51 percent rate the escalation of military conflicts as threatening. Confidence in US President Donald Trump's economic policy is low; His strategy, which is based on the motto “Make America Great Again,” is seen as having little impact on the US economy and the impact on international trade and alliances is judged to be minimal.

Inflation and key interest rates

The Federal Reserve's monetary policy is also currently causing concern. 65 percent of respondents are concerned about the independence of the US Federal Reserve. Against this background, 80 percent of participants expect that the key interest rates will be between 3 and 4 percent in one year. The current US key interest rate is between 4.25 and 4.50 percent. In May, an inflation rate of 2.4 percent compared to the previous year was recorded.

Another point raised by central bankers is the risks of a possible restructuring of US debt, a scenario that almost half of those surveyed believe is conceivable. Additionally, gold remains a sought-after investment and is viewed as offering the best risk-adjusted return for the next five years. Green bonds and corporate bonds are also gaining importance, while the trend towards increasing the weighting of equities is slowing.

European inflation risks

In Europe, inflationary tendencies are at the center of debates. The inflation rate in Germany has exceeded 8 percent for several months, with a current value of 8.8 percent in August 2022, as the Bundesbank reported. This persistently high value is reminiscent of the first oil crisis in the 1970s. The high inflation is caused in particular by Russia's war against Ukraine and its economic consequences as well as ongoing supply chain disruptions and rising energy prices.

The lessons from the past illustrate the need for decisive monetary policy. The Eurosystem's measures, in particular the cessation of net purchases of securities in June 2022 and the first increase in key interest rates in eleven years in July 2022, are intended to help bring inflation under control. The credibility of the inflation target must be maintained to avoid unanchoring inflation expectations. The challenge of controlling inflationary tendencies remains a central task for central banks in the current geopolitical situation.