A famous story by Gabriel García Márquez tells the story of a woman telling her two children at breakfast time that she woke up with a premonition that “something very dangerous was going to happen to this city”. Throughout the day, the impression turns from rumor to shared certainty, turns into mass panic, after which residents flee in horror from the place.
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In the end, while the homes their owners have burned down so that the imagined misfortune will not spread and the exodus begins, the Lady of the Omen concludes: “I said something very serious was going to happen, and they told me I was crazy.” This shuts down the expectations that were, in themselves, the reason for her turning into Reality.
There is no shortage these days of those who remember writing the Colombian Nobel Prize when observing the course of economic events and pointing out that the world is heading toward a self-fulfilling prophecy. According to this view, with much talk of deterioration, the planet is heading for a significant slowdown.
The data appears to prove correct. Federico Manecardi of JPMorgan notes that The number of articles referring to the word stagnation — defined as two consecutive quarters of negative growth — has increased 10-fold in recent months. And they are approaching the maximum at the beginning of 2020, when the epidemic began.
Hence the reaction to the seemingly good news at first glance. According to the US Bureau of Labor Statistics, the world’s largest economy saw an increase of 372,000 employees last month, a number that far exceeded analyst expectations.
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The report not only kept the unemployment rate at 3.6 per cent – very close to historical lows – but also allayed concerns about a sharp slowdown in the pace of business in the northern country. And while leaders like Joe Biden welcomed the news, the markets’ response has been less enthusiastic, with many stock indices falling rather than improving.
The reason is that Those who see beyond the situation see a new rate hike inevitable with the goal of cooling the engine with signs of overheating.. In other words, a good number today is a prelude to the stronger pressure that comes tomorrow that is changing the mood of investors, something that is causing turmoil being felt on all five continents.
Anyone who doubts that should just watch what is happening in Colombia these days. The fact that the exchange rate reached its highest point in its history on Friday, reaching 4,438 pesos to the dollar, is directly related to the challenging international environment.
And the challenges are not part of the imagination. Contrary to the story in the beginning, the stakes on this occasion are real and are the order of the day.
First of all, inflation rises sharply in almost all latitudes, with a few exceptions, such as China. The global average that was close to 3 per cent a year ago is now close to 9 per cent. And as far as the more developed countries are concerned, the number is the highest in the last four decades.
Understanding why price increases accelerated requires a return to the bottlenecks caused at the time by the coronavirus. While the contagion led to production setbacks in multiple sectors, relief programs launched by governments prevented a decline in consumption.
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As a result, demand remained strong while the supply of various commodities faced stagnation. When the restrictions on movement began, the gap became even more pronounced. However, until the end of 2021, these tensions were believed to be temporary. The Russian invasion of Ukraine greatly changed the outlook, exacerbating the scarcity of grain, hydrocarbons, and minerals.
Faced with accumulating pressures, there was no other choice but to flick the well-known cookbook. Many central banks are starting to raise the cost of money, which will eventually make credit more expensive and cause people to postpone their purchasing decisions.
Ideally, moderation in consumption will bring back the balance between supply and demand and everything will return to normal. This is the long-awaited “quiet landing” that specialists are talking about.
Unfortunately, this is not so simple in practice. First of all, not all markets stabilize at the same time and individual conditions are not the same.
Even if the fire appears to be in its infancy, the method of extinguishing each fire source varies and is subject to the particular terrain and wind conditions. In addition, the side effects of the aggravation of the situation in certain areas must be taken into account, while the effect can be isolated in others.
More precisely, Argentina or Turkey are going through very bad times on this front, but what is more dangerous is that the United States is finding it difficult to contain the famine, because the decisions made by its authorities have repercussions for other countries. Aside from making debt more expensive, higher interest rates affect perceptions of risk and lead capital to seek refuges they consider safer, starting with dollar-denominated assets.
For this Those who say that the devalued peso doesn’t really matter are wrong. The value of imported raw materials, as well as intermediate goods and finished products, affects the standard of living of the population in general.
As if that weren’t enough, Colombia also has a real inflationary headache that is most acutely felt by those at the bottom of the income pyramid. As the Dane explained this week, the annual rise in the household basket is 9.7 percent at the end of June, but for the lower classes, this indicator is almost two percentage points higher.
Back in the US economy, there are many indications that things are not quite right. Aside from the fact that retail sales fell in May, consumer confidence in June was at its lowest level since it began to be measured in the last century.
Similarly, the real estate market is in a slump, because mortgage payments have risen and buyers’ appetite has disappeared, which has also led to the cancellation of new construction projects. In contrast, stocks experienced their worst first half since 1970, posting an average decline of 19 percent.
Why then do work and wages continue to increase? Areas such as professional services or those related to restaurants and tourism continue to expand, something that could help cushion the blow in the North American case.
The future of Europe is more complex. Vladimir Putin himself, alarmed by Ukraine’s military support, warned last week of the damage it could do to the old continent if he cuts off natural gas supplies soon and halts oil shipments.
Although there is still something of a dead calm, few observers would argue that Europeans are facing a recession directly related to the cost of energy. The road would be much more complicated if there were energy rationing that would happen once temperatures started dropping in the last quarter.
With such a threat all around us, it remains to be seen if the local community bloc’s central bank raises interest rates in September. At the moment, it is clear that the euro is one of the main victims of the situation, because in the past twelve months it has fallen by 14 percent against the dollar and was traded one by one on Friday.
Among the unknowns that still stand, the price of primary commodities comes to the fore. Copper, which has reached record levels recently, is down 20 percent from levels at the start of the year.
Meanwhile, staples like corn and wheat are far from the points reached in March and May. For major grain importers, this constitutes a very welcome relief that translates into a slight change of direction in the direction of inflation..
As for the oil, there are visions for all tastes. While there are those who believe that the economic slowdown will translate into lower oil consumption, others say that China has regained strength after the April restrictions to suppress the epidemic in its territory.
And the most extreme insist that pressure on the bid is approaching on behalf of Russia. Under this perspective, The fact that the barrel price reached below $100 last week will be a temporary anomaly, as a significant rebound appears inevitable..
Whatever the case, shocks are meant to become the norm rather than the exception in the coming months. The combination of economic hardship and a particularly complex geopolitical reality leaves little room for optimism.
To sum it up in one sentence, tough times are coming for many because global growth will be lower and interest rates will continue to rise. A handful of emerging countries – in Latin America, Africa and Asia – will go into recession, along with most developed nations, something that will hit those on the other side of the Atlantic more than North America.
Others will win if they know how to play their cards correctly. Colombia may be in this group, but that will depend on whether the new government knows how to maintain consumer and private sector confidence, along with that of foreign investors.
So far, the process is not progressing well at all. Along with messages of moderation from the Petroleum Department and the formation of the government that will take office on August 7, headed by a finance minister who knows the trade, there are indications that the perception of political risk is affecting us.
First of all, it is known that although most currencies have lost their strength against the dollar, in the case of the peso, the decline is even more severe, which makes servicing external debt more expensive and increases pressure on the family basket. What worries us is that credit risk – measured by what’s known as five-year credit default swaps – is rising and is now similar to that in Brazil, when months ago it was similar to that in Mexico, one step below.
And therefore, The next team needs to understand that the environment is challenging and that the tolerance for experiments with questionable outcomes is much lower. In this sense, some consistency in the messages will be very useful, starting with clarifying the goal of financial responsibility and seriousness in fulfilling the state obligations obtained.
If not, the voices that “something very dangerous is going to happen to this city” will intensify. In order not to fulfill the disastrous predictions of the García Márquez story, it will be necessary to establish facts and good policies that, despite everything, Colombia will manage to safely emerge from this difficult global situation.
Ricardo Avila Pinto