Fear Of Global Inflation Takes Hold

While China’s growth curve has turned negative, major economies around the world are yet to totally come out of the woods

The US frontline benchmark indices Dow Jones, S & P 500 and Nasdaq ended the fortnight on a positive note in the green territory, up by 1.71 per cent, 1.86 per cent and 1.76 per cent, respectively. US President Joe Biden recently signed a legislation for temporarily raising the government’s borrowing limit to USD 28.9 trillion, pushing off the deadline for debt default only until December 2021. The US economy created jobs at a relatively slower-thanexpected pace during September 2021. The Labor Department reported that non-farm payrolls rose by just 1,94,000 in the month compared with the Dow Jones estimate of 5,00,000.

The unemployment rate fell to 4.8 per cent, better than the expectation of 5.1 per cent and was the lowest since February 2020. The drop in the jobless rate came as the labour force participation rate edged lower i.e. people who were sidelined during the pandemic have rejoined the workforce. London’s FTSE 100 and France’s CAC 40 indices gained 2.57 per cent each during the fortnight. The International Monetary Fund (IMF) recently raised its forecast for Euro zone economic growth in 2021 as France and Italy put in betterthan- expected performances with easing pandemic restrictions.

It currently expects growth of 5 per cent for the single currency area, compared to just 4.6 per cent in its previous forecast in July 2021. Even the French government itself revised expectations for the year to 6.25 per cent, following the success of the virus inoculation campaign and the introduction of a health pass that had little impact on economic activity. However, Germany saw its 2021 growth downgraded to 3.1 per cent due to shortfalls in supplies affecting the industrial sector. Germany’s benchmark index DAX surged by 2.02 per cent to close the fortnight at 15,462.72.

Hong Kong’s Hang Seng index climbed 1.57 per cent while Japan’s Nikkei and China’s Shanghai indices ended in the red territory, down by 0.77 per cent and 0.28 per cent, respectively. The IMF has also lowered China’s growth forecast for the current year. Large-scale disorderly corporate debt defaults or restructuring has been cited as the reason. In April, the IMF had pegged China’s growth this year at 8.4 per cent. China’s growth for next year has been reduced to 5.6 per cent. China’s foreign exchange reserves, the largest in the world, fell to USD 3.2006 trillion at the end of September, down USD 31.5 billion from a month earlier.

As per the State Administration of Foreign Exchange (SAFE), the volume went down 0.97 per cent from the end of August 2021. The resurgence of the pandemic, expectations for major countries’ monetary policies, increase in dollar index, weakened non-dollar currencies and the change of asset prices led to the fall in China’s foreign exchange reserves. The IMF has warned of growing inflationary pressures in the global economy, making clear its greatest concern is that rising prices will lead to a push for higher wages. Inflation is the biggest risk facing economies worldwide and may lead to a meaningful correction in global equity markets.