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London (CNN Business)As the World Bank and the International Monetary Fund kick off their spring meetings this week, both are sounding a warning: The global economy, they say, is quickly losing steam.
What’s happening: The World Bank has slashed its forecast for global growth in 2022 to 3.2% from 4.1%, anticipating a sharp deceleration from estimated growth of 5.5% in 2021. The IMF’s latest outlook arrives later Tuesday.
World Bank President David Malpass told journalists that “severe overlapping crises” are weighing on the recovery.
“There’s Covid-19, inflation and Russia’s invasion of Ukraine,” he said on Monday.
Developing countries, many of which are facing high levels of debt and a plunge in the value of their currencies, as well as soaring food prices, are of particular concern, he added.
Breaking it down: Around the world, engines of growth are sputtering as prices rise and the war in Ukraine wreaks havoc on strained supply chains.
Europe, which relies heavily on Russia to meet its energy needs, is especially exposed. There, much could depend on Russian President Vladimir Putin’s next move. If supplies of Russian natural gas to Germany were suddenly cut off, Europe’s biggest economy would lose a shocking $238 billion in economic output over the next two years, the country’s forecasters have said.
In the United States, inflation has hit a level not seen in four decades. That’s forced the Federal Reserve to consider an aggressive pullback of its pandemic-era support for the economy, boosting fears that it could hike interest rates so much that it causes a recession.
And China saw retail sales plunge 3.5% in March from a year ago as tough lockdowns aimed at curbing the spread of Covid-19 weighed on activity in major hubs like Shanghai.
While Europe is the most vulnerable, Goldman Sachs this week put the odds of a US recession at 15% in the next 12 months and 35% within the next 24 months. Japan’s Nomura said Monday that the chances are rising that China falls into a recession this spring.
That’s not all: Smaller countries are also struggling. Many borrowed heavily over the past decade to deal with the effects of the 2008 financial crisis and the pandemic. Now, interest rates are starting to rise, just as the prices of essentials like food and fuel leap.
“I’m deeply concerned about developing countries,” Malpass said. “They’re facing sudden price increases for energy, fertilizer and food, and the likelihood of interest rate increases. Each one hits them hard.”
See here: Sri Lanka is in talks with the IMF for emergency financial assistance as it battles an economic crisis. The island nation of 22 million people is dealing with power outages and severe shortages after running down its stash of foreign reserves.
The growth downgrades are another knock to fragile investor sentiment. The CNN Business Fear & Greed Index is back in “fear” territory, after producing a “neutral” reading one week ago.
Bank earnings signal dark clouds on the horizon
America’s biggest lenders have deep insight into the health of the country’s economy. So when their earnings show signs of strain, it’s bad news for the path ahead.
The latest: Bank of America (BAC) was the last to share its results on Monday. The company posted a profit of $7.1 billion for the first three months of the year, a 12% decline compared to the same period in 2021.
Citi (C), Goldman Sachs (GS), Morgan Stanley (MS), Wells Fargo (WFC) and JPMorgan Chase (JPM) also saw large declines in profit during the first quarter.
Bank of America’s stock rose more than 3% on Monday, since it still managed to beat Wall Street’s expectations. But the sector is under pressure. The KBW Bank Index has shed 12% since the beginning of March.
Big takeaways: Market turbulence has put a chill on dealmaking, which was a huge boon to banks last year. Goldman Sachs, for example, saw its investment banking revenues fall to $2.4 billion, a 36% drop compared to the first quarter of 2021.
Main Street is holding up better than Wall Street.
“Lending strength continued with average firmwide loans up 5% while credit losses are still at historically low levels,” JPMorgan Chase CEO Jamie Dimon said last week. “We remain optimistic on the economy, at least for the short term — consumer and business balance sheets as well as consumer spending remain at healthy levels.”
But he cautioned that the outlook is increasingly murky, pointing to “significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”
Could the Fed go for an extra supersized rate hike?
One of the Federal Reserve’s top hawks, who has been advocating for the central bank to take a tougher stand against inflation, isn’t ruling out the need for an extra big interest rate hike to get the situation under control.
Increasing rates by 0.5 percentage points would already be a supersized move. But Federal Reserve Bank of St. Louis President James Bullard said Monday that an increase of 0.75 percentage points shouldn’t be off the table, even if he doesn’t expect this will be necessary.
“Inflation’s far too high for comfort,” Bullard told the Council on Foreign Relations. “We have to move to get inflation under control.”
Gut check: Traders are largely shrugging off his comments. Investors think there’s a 91% probability that the Fed hikes interest rates by 0.5 percentage points in May. They don’t see any chance of an even bigger rise for now.
Still, Bullard’s remarks signal the extent to which the Fed is in a tight spot as prices in the United States rise at their fastest clip in 40 years.
The comments “really encapsulate the quandary that many of the world’s central banks have found themselves in,” Oanda analyst Jeffrey Halley told clients Tuesday. “Having completely missed the ball around transitory versus embedded inflation, there are no palatable solutions.”
Truist (TFC), Hasbro (HAS), Johnson & Johnson (JNJ) and Lockheed Martin (LMT) report results before US markets open. IBM (IBM) and Netflix (NFLX) follow after the close.
- US housing starts and business permits for March post at 8:30 a.m. ET.
- The IMF’s latest global economic outlook arrives at 9 a.m. ET.
Coming tomorrow: Earnings from Procter & Gamble (PG), Tesla (TSLA) and United Airlines (UAL).
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