ALEX BRUMMER: US downturn is a jolt to global prospects

US jolt to global prospects: Recession threat is putting age old global supply chains and trading systems at risk, says ALEX BRUMMER

Former US Treasury Secretary Lawrence Summers has been a siren voice on the American economy, arguing that the Federal Reserve’s delayed response to inflation, coupled with low unemployment, made a recession likely within two years.

It may arrive sooner than Summers expected, with American output shrinking by 1.4 per cent in the first quarter.

What is surprising about the data is that none of the platoons of forecasters saw it coming, with the consensus being a one percentage point expansion.

Former US Treasury Secretary Lawrence Summers (pictured), warned the Federal Reserve’s delayed response to inflation, coupled with low unemployment, made a recession likely

The post-event rationalisation is to blame the dip on Omicron congestion at the ports, which hit exports and stock building. Another factor was the withdrawal of public sector fiscal support put in place in the pandemic.

What is more worrying, as central banks in the US and Britain limber up to raise interest rates next week, is the impact on personal consumption – a big driver for Western economies. The data suggests it climbed in January but fell back sharply in the following two months.

This may be pandemic-related but it is hard to escape the fact that, even though Americans are sitting on high levels of Covid savings, real personal disposable income – money to spend after tax and inflation – fell at an annualised 2 per cent over the period.

That is about the same squeeze on incomes that is projected for 2022 in Britain by both the Bank of England and Office for Budget Responsibility.

Central banks do not much like raising interest rates into a slowing economy, for fear of causing a slump. But with inflation showing no signs of subsiding, quite the contrary, they may have no choice.

The bigger question for rate-setters on both sides of the Atlantic is whether to hit consumption and output hard now, at the risk of recession and unemployment, or take matters more gradually and trust more painful outcomes can be dodged.

There is the possibility that Covid followed by war in Ukraine could be the kind of seismic moment that changes the world.

A benefit of globalisation has been cheaper prices for everything. Cut Russia and Ukraine out of the picture and you have soaring European gas prices, the loss of farm output from one of the grain baskets of the world as well as shortages of fertilisers and valuable metals such as nickel.

Supply chains and open trading systems which took almost a century to recover after the golden era of 1870s to 1914 ended, are in danger again.

So is expansion and prosperity.

Price points

The challenging world of soaring input prices is dominating life for Alan Jope, the chief executive at Unilever.

In the first quarter, inflation added £1.8billion to raw material costs and they keep on rising, with an estimate for the second quarter of an extra £2.3billion.

Unilever is able to pass through most of the hurt with sales growth of 7.3 per cent, largely the result of higher prices.

Strong brands such as Dove and Hellmann’s offer a degree of protection from a fall in demand. But in Latin America, where prices jumped by 16.4 per cent, sales volumes shrank by 5.7 per cent. Higher incomes in the West offer insurance against shrinking demand.

An encouraging aspect of the Unilever tale is that strategic moves into the fashionable space of Prestige beauty and functional nutrition – such as Smartypants vitamins – is boosting the growth narrative.

Across the globe beauty and personal care, the company’s biggest segment, outpaced home care and food over the period.

In spite of the inflation challenge, targeted share buybacks of £2.5billion or so remains intact, with the first slug of £633million under way. Phew!

Winters’ dawn

The seven-year stint of Bill Winters as chief executive of Standard Chartered can hardly be counted as a roaring success, with the shares halving in value.

He has striven to repair the balance sheet and the emerging market bank’s shabby reputation. A return to robust growth in the face of difficult conditions in Hong Kong and China is something of a victory.

It has been aided by volatility in commodity markets, which lifted trading income by 32 per cent. 

Whether growth and recovery can be sustained, should financing cracks open up in developing markets, is less predictable.

Its investors are used to that.