Published in Finans.dk on May 25, 2022 by David Bakkegaard Karsbøl, CIO in Selected Group

Tighter monetary policy, the Chinese lockdown, weaker consumption and a slowdown in the housing market are causing a significant slowdown in the global economy.

In recent months, interest rates have risen considerably as a result of significantly higher inflation than expected. My best guess is that we are now close to a peak because many of the factors that have been pushing inflation and interest rates upwards will be weaker over the coming months.

First and foremost, there is monetary policy, which, together with energy supply disruptions in Europe, has been the main driver of higher inflation. Central banks have now almost all committed to tightening monetary policy - either through the winding down of bond purchase programs or through outright interest rate hikes.

Tighter monetary policy means lower long-term inflation, and therefore - all else being equal - lower long-term interest rates.

Then there is consumption, which until now has been supported by very large increases in homeowners' equity. With the historical increases in interest rates, it has become more expensive to buy property, which will lead to stagnating house prices. Once equity values stop rising, consumption will weaken and inflationary pressures will subside.

In addition, wages have not yet kept pace with inflation. Consumers have therefore experienced a rather large fall in real wages over the past months, which has reduced their purchasing power. For US consumers, we have seen a larger decline in real wages than during the financial crisis. Lower consumption means lower employment, lower activity and lower inflation expectations.

Then there is China, where the Communist Party, for unexplained reasons, has chosen to initiate an extremely tough corona lockdown of Shanghai, among other places. The port city is hermetically sealed and transport ships are piling up in the waters off the city.

The lockdown in China will significantly reduce Chinese activity, and we have already seen an 11% drop in retail sales. However, in addition, the lockdowns will further disrupt global supply chains and force companies to reduce production and/or send employees home.