Inflation rates are peaking in all corners of the globe, having risen on the back of cheap money during the recent pandemic and surging energy prices. Central banks are fighting this wave of price gains by drastically tightening monetary policy. The market now expects short-term rates to be 3.5% in the US and 1.7% in Europe. But policy rate hikes may turn out to be more moderate than currently expected. The European Commission believes that inflation has probably peaked and as a result expects a rate of 7.6% in 2022, falling to 4% in 2023.

The first effects of restrictive monetary policies are being felt. Experts are revising down their growth forecasts. The International Monetary Fund (IMF) puts US growth at 2.3% this year. The equivalent figure for Europe, issued by the European Commission, is 2.4%. Perhaps these forecasts are slightly too upbeat, especially for Europe. It is estimated that growth will be positive but closer to the zero mark. This is because the labour market in Europe is much less flexible than in the US and does not have scope for wage adjustments based on current inflation. Making matters worse, Europe has scant production assets for fossil fuels and is therefore dependent on the prices set by global markets. Demand is beginning to wane in tandem with higher petrol-pump prices. Note that oil prices – though still lofty and subject to fluctuations – have reverted to below their June peak.

The macroeconomic slowdown has well and truly begun. The probability of a recessionary interlude has increased to 50% in the US and is even higher in Europe. But strange times also bring opportunities. History has shown that periods of economic downturn have been followed by periods of high returns for those investors who have taken advantage of adverse conditions. Financial markets and the real economy tend to evolve out of step with each other. The former acts as a leading indicator of the latter, so during difficult times the market falls back early on but also bounces back before the economic upturn is replicated in the statistics.

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