What We're Reading:

What We're Reading:

Risk of global recession in 2023 rises amid simultaneous rate hikes. As central banks across the world simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023 and a string of financial crises in emerging market and developing economies that would do them lasting harm. (World Bank)

Bank of England raises rates but avoids bolder hike like Fed. The Bank of England raised its key interest rate by another half-percentage point to the highest level in 14 years, but despite facing inflation that outpaces other major economies, it avoided more aggressive hikes made by the U.S. Federal Reserve and other central banks. (AP News)

Euro plummets to a 20-year low amid war in Ukraine. The euro has dropped to a historic low against the U.S. dollar as a result of soaring inflation, the war in Ukraine and increased energy and food prices. (DW)

Smaller economies in Latin America and Caribbean face a bigger inflation challenge. Less diversified economies, greater reliance on imports and higher public debt make fighting inflation more difficult. (IMF)

Overstretched US companies feel pinch of higher borrowing costs. Companies that binged on cheap debt in the past 15 years are now confronted with higher borrowing costs as a result of central banks tightening their monetary policies, restricting their ability to hire and retain employees, as well as invest in their business and return capital to shareholders. (HSN)

Lebanese banks to shut indefinitely after flurry of holdups. Lebanon’s banks are to remain closed indefinitely due to ongoing “risks” to employees and customers, the Association of Lebanese Banks announced. (CNN)

US ports face empty container “pile-up” as supply chains recover. Analysts are warning that ports in North America could become overwhelmed by a build-up of empty containers, as trans-Pacific supply chains and transportation times gradually return to pre-pandemic levels. (Global Trade Review)

Europe burns cash to help businesses in deepening energy crisis. Germany nationalized gas importer Uniper and Britain said it would halve energy bills for businesses in response to a deepening energy crisis that has exposed Europe’s reliance on Russian fuel. (HSN)

The US dollar is decimating world currencies. Here's how other countries are responding. The stronger dollar has prompted more rate hikes around the world as central bankers try to increase the value of their own currencies. (Quartz)

Fed Chair’s stark message: Inflation fight may cause recession. The Federal Reserve delivered its bluntest reckoning Wednesday of what it will take to finally tame painfully high inflation: Slower growth, higher unemployment and potentially a recession. (Business Mirror)

‘Our world is in peril’: At UN, leaders push for solutions. The world’s problems seized the spotlight Tuesday as the UN General Assembly’s yearly meeting of world leaders opened with dire assessments of a planet beset by escalating crises and conflicts that an aging international order seems increasingly ill-equipped to tackle. (Business Mirror)

The economic slowdown in China is cause for concern across global markets. Different countries will emerge winners and losers as a result of China’s sputtering economic growth. The Union Bank of Switzerland (UBS) downgraded full-year growth forecasts from 3% to 2.7% for 2022 and 5.4% to 4.6% for 2023—while China’s COVID-19 policies are still in effect. “While some of the current policy support will bear more fruit in Q4, the Covid situation will likely remain challenging into the winter and early 2023, and export growth is set to slow,” Tao Wang, UBS chief China economist said in a note, per CNBC.

The Chinese economy has shown signs of weakening growth since April when GDP went from a 4.8% year-over-year jump in Q1 to just 0.4% in Q2. “… the risk is increasing that the funds and liquidity are idling within the financial system, due to deterioration of credit demand from the real estate sector. The short-term bill financing of the four state-owned banks and national large banks rose by 148.0% and 102.7% year on year in July 2022, while the growth rate of short-term and long-term loans from these banks declined,” reads an article from Brink News.

China’s strict Covid lockdown policy also feeds the raging supply chain disruptions. In a recent FCIB Credit and Collections survey, results showed 57% of respondents that said supply chain and shipping issues are the most common reason for payment delays. Shipments to the U.S. have declined to their lowest level since June 2021, which typically signal new supply issues, according to Bank of America.

23% of the survey respondents said payment delays have increased, while 46% said payment trends have stayed the same. One FCIB survey respondent recommended “to understand the golden tax rules, bank draft (common payment in China similar as cheque payment) and China's State Administration of Foreign Exchange,” when extending credit in the country.

Economists have predicted Chinese currency to weaken even more against the U.S. dollar—with the value of yuan fallen to its lowest level since July 2020, per CNBC. “We expect CNY [Chinese Yuan] weakness to persist in the near-term, underpinned partly by broad USD strength,” Goldman Sachs economists said.

China’s slowing economy will have a domino effect on the U.S., Europe and Latin America tentative to how the country reacts to currency and commodity markets, according to Markets Insider. On the positive side, yuan weakened against the U.S. dollar will help ease inflation. Bank of America said that a 10% appreciation in the dollar lowers personal consumption expenditures inflation by approximately 0.4 percentage points. If China decides to ease their lockdowns, it can reduce price pressure on non-energy goods in Europe—and with Latin America, China’s lower commodity prices can help inflation slowdown from a 12% peak to 6.5% by the end of the year, Bank of America said.

The September Credit and Collections survey is now open. Countries being surveyed are: Ecuador, Egypt, Honduras and Turkey.

Since the Russian invasion of Ukraine, the lack of energy resources has created costly ramifications, including structural inflation. “A lot of the economists say that we are well into structural inflation with energy being the biggest factor, believe it or not,” said Jay Tenney, managing director at Trade Risk Group (Irving, TX), during FCIB’s Global Expert Briefing.

Structural inflation is caused when producers are unable to adapt to rapid changes in the economy, such as a major shift in supply and demand. The latest example is the Russia-Ukraine war and its impact on energy prices. “If you start raising the price of oil and gas, you will accelerate the price increases for everything around the world because that component goes into not only transportation, but into the actual products that are being manufactured,” Tenney said.

In the first two weeks after the invasion, the prices of oil, coal and gas in Europe went up by around 40%, 130% and 180%, respectively—while gas prices drove up wholesale electricity prices, per the European Central Bank.

Now, Russia has removed the natural gas supply from Europe, driving up inflation. “Although there are several ways to generate electricity—such as coal, nuclear, hydroelectric, wind and solar—the price of natural gas is hugely influential in setting electricity prices because gas-burning generators are most often paid to go into service when a power grid like Britain’s needs more electricity,” reads an article from the New York Times.

This lack of supply creates competition with energy prices rising in other parts of the world. “We’re seeing Argentina and Turkey for example, and they’re a little unique with what’s going on in their countries, but their annual inflation rates are running anywhere from 80-100% cliff now. We’re complaining about 8.5% and they’re almost 10 times worse,” Tenney said.

Governments around the world have started taking steps to cap energy inflation, all at varying degrees. “Countries have announced energy savings campaigns to encourage the public to reduce power consumption during the winter,” per Barron’s. British Prime Minister Liz Truss recently implemented an energy bill freeze. “She also plans to subsidize heating fuel costs and heating oil costs for this winter because they’re really concerned about political upheaval and turmoil, even in the Eurozone,” Tenney said.

Register today for the next Global Expert Briefing on Oct. 21. Global Expert Briefings are complimentary for FCIB members as a benefit of membership.

After taking a hit at the onset of the pandemic, the commercial real estate sector—properties primarily owned for investment purposes—has been on the mend. Prices of industrial and residential properties have surged globally since the end of 2020, while the worst-affected retail and office segments have shown some signs of stabilization.

The momentum, however, seems to be losing steam as global financial conditions have tightened this year as central banks shift to hiking interest rates. Property prices in the industrial and residential segments have, on average, experienced a deceleration across regions in recent months. At the same time, the depreciation in retail and office property prices has increased.

Tighter financial conditions tend to have a direct impact on commercial property prices by making it more expensive for investors to finance new deals or refinance existing loans, thereby lowering investment in the sector. They could also have an indirect impact on the sector by slowing economic activity, reducing demand for commercial property such as shops, restaurants and industrial buildings.

In a recent analysis, we find that financial conditions are indeed an important driver of commercial real estate prices, and they help to explain the divergent performance of the sector across regions during the pandemic.

In general, economies with easier financial conditions (that is, lower real interest rates and other market conditions that make it easier to obtain financing) saw a smaller decline in commercial property prices during the pandemic and a faster recovery. Commercial property prices have also been higher in countries which implemented relatively less stringent public containment measures to control the spread of the virus, rolled out larger fiscal support packages and have a higher vaccination rate.

A sharp tightening in financial conditions could thus put the commercial real estate sector under renewed pressure, especially in regions where economic growth prospects are weak and if stringent containment measures need to be put in place to curb new waves of infections.

Our analysis also suggests that trends catalyzed by the pandemic, such as working from home and e-commerce, have an impact on commercial real estate prices.

Increased teleworking, for example, tends to reduce demand for office space, while e-commerce adversely affects the price of retail real estate as consumers shop online. As considerable uncertainty surrounds the future pace and extent of such structural shifts, tighter financial conditions could compound these effects and exacerbate downward price pressures in the affected segments.

Disruptions in the commercial real estate market could in turn potentially threaten financial stability through the connectedness of the sector with the financial system and the broader macroeconomy. Continued vigilance is warranted on the part of financial supervisors to mitigate such risks.

To ensure banking-sector resilience, stress-testing large declines in commercial real estate prices should be conducted to inform decisions regarding the adequacy of capital buffers for commercial real estate exposures. Banks’ commercial real estate valuation assumptions should also be reviewed to ensure that provisions are adequate. In regions where nonbank financial institutions are important players in commercial real estate funding markets, efforts should focus on broadening the reach of macroprudential policy to cover these institutions to mitigate systemic risks.

Reprinted with permission; IMF Blog.

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate