IMF Warns of Economic Recession While Central Banks Can Only Raise Rates Against the Trend

Huitong Finance APP News — On March 20, the Middle East geopolitical conflict continues to escalate, causing energy prices to soar sharply. The International Monetary Fund (IMF) has issued successive warnings, indicating that global inflation and growth prospects are facing significant downward pressure.

Meanwhile, as the core engine of the global economy, the U.S. labor market continues to cool down. Major central banks’ monetary policies are accelerating their divergence, leading to an important turning point in the global financial markets and exchange rate patterns.

IMF Warning: High Energy Prices Will Boost Inflation and Suppress Global Growth

The IMF recently issued a clear warning that sustained increases in energy prices will intensify global inflationary pressures and hinder economic recovery.

The IMF is closely monitoring conflicts related to Iran, energy production, and disruptions in maritime logistics. It points out that this round of conflict has severely impacted maritime oil and gas transportation, pushing international crude oil prices up by over 50%, with Brent crude stabilizing above $100 per barrel.

IMF spokesperson Julie Kozack stated that the organization has not yet received formal emergency financing requests from member countries but is prepared to provide support at any time and maintains close communication with finance ministers, central bank governors, and regional financial institutions.

She emphasized that the overall economic impact of the conflict depends on its duration, intensity, and scope. An assessment of these factors will be included in the IMF and World Bank’s spring global economic outlook report to be released in mid-April.

According to IMF estimates, a 10% increase in energy prices sustained for a year could raise global inflation by 40 basis points and reduce economic output by 0.1% to 0.2%. If oil prices remain above $100 throughout the year, it will have a significant impact on global inflation and economic growth.

Kozack advised central banks to remain highly vigilant, closely monitor whether inflationary pressures are spreading beyond energy sectors, and whether inflation expectations remain stable.

The IMF’s preliminary assessment suggests that this conflict will suppress the economic growth of Gulf Cooperation Council countries, with the ultimate impact depending on their ability to restore oil and gas exports.

U.S. Labor Market Slowing: Weakening Employment Momentum Seen from the Beveridge Curve

As the core driver of the global economy, the U.S. labor market is showing clear signs of cooling, which can be more clearly understood through the Beveridge Curve.

The Beveridge Curve reflects the negative correlation between job vacancy rates and unemployment rates. Changes in the curve can directly illustrate the tightness and matching efficiency of the labor market.

(Beveridge Curve, Source: U.S. Department of Labor)

The curve shows that, affected by the pandemic, it quickly deteriorated from position 1 to 2. Although the labor market has since recovered, it remains near position 3, indicating a stable unemployment rate but a continuous decline in job vacancies, reflecting weakening matching efficiency.

In the context of no significant improvement in non-farm employment, this suggests that while unemployment appears stable, employers’ willingness to hire is cooling, and the supply of effective jobs is shrinking. The actual activity level of the labor market is declining.

Currently, the U.S. labor market shows a simultaneous decline in both job vacancies and employment numbers, with vacancies decreasing at a faster rate, indicating a clear weakening of employer hiring intentions and a gradual shift from overheating to cooling.

(Employment-to-unemployment ratio, Source: Federal Reserve)

The chart shows the labor market continues to contract, with the gray area representing the pandemic period.

Rapid declines in vacancies and sluggish employment growth imply weakening household income and consumption momentum, leading to a decline in endogenous economic growth. However, due to rising energy prices, the Producer Price Index (PPI) in February rose ahead of the war, and the Federal Reserve has also raised inflation expectations, making policy decisions more cautious and difficult to shift easily toward easing.

Global Central Bank Policy Shift: Fed Remains on Hold, Many Countries Accelerate Hawkish Stance

The surge in energy prices has completely rewritten global interest rate expectations, causing significant divergence in the stance of major central banks. The Federal Reserve remains the only major central bank expected not to raise interest rates this year.

Before the conflict erupted in late February, markets widely expected the Fed to cut rates twice this year. Now, this expectation has greatly diminished, and a rate cut within the year is considered unlikely.

The Fed held steady this week as scheduled. Chairman Powell stated that it is currently impossible to assess the scope and persistence of the economic impact of the conflict.

In stark contrast, other major central banks are quickly turning hawkish:

The European Central Bank (ECB) held steady on Thursday but warned of inflation risks driven by energy prices. Policymakers may start discussing rate hikes next month, with markets already pricing in a rate increase before June.

The Bank of England also kept rates unchanged but signaled readiness to act at any time, leading to rare sell-offs in short-term UK bonds. Markets have shifted from expecting rate cuts to pricing in an 80 basis point hike by the end of the year.

The Bank of Japan hinted on Thursday that it might raise interest rates as early as April, breaking the consensus expectation of continued yen weakness and causing the yen to rebound sharply.

The Reserve Bank of Australia (RBA) raised rates for the second time in two months. Markets generally expect further rate hikes, supporting a stronger Australian dollar.

While the U.S. labor market is deteriorating and rate cuts are unlikely, the overall hawkish shift among major economies—despite better-than-US economic data from Japan and Australia—will likely impact global economic growth.

Market Dynamics Shift: Dollar Weakens Temporarily, Still Has Safe-Haven Support

Influenced by divergence in global central bank policies, the dollar retreated from multi-month highs this week. The dollar index stabilized at 99.46, with an expected weekly decline of 1%, marking the largest weekly drop since late January.

The euro, yen, pound, Swiss franc, and Australian dollar all strengthened against the dollar this week: early Asian trading saw the euro dip slightly to 1.1558, up 1.2% for the week; the yen fell back to around 158, up 0.9%; the pound steadied at 1.3408, up 1.4%; and the Australian dollar approached 0.71, up 1.5%.

However, most institutions believe the dollar will find it difficult to sustain its weakness. Carol Kohn, currency strategist at Commonwealth Bank of Australia, said that the longer the conflict lasts, the more likely the dollar will strengthen, benefiting from safe-haven inflows and as the U.S., as an energy exporter, directly benefits from high oil prices.

(Dollar Index daily chart, Source: Yihuitong)

Geopolitical Tensions Slightly Eased, Energy Market Continues to Influence Global Economy

On Friday, international oil prices saw a slight pullback. Previously, Trump called for Israel to cease attacks on Iranian energy facilities, while Basent suggested the U.S. might soon lift sanctions on Iranian oil stranded on tankers and hinted at additional releases from strategic reserves, providing temporary relief to energy markets.

Trump ruled out deploying ground troops, and Israel also promised to delay further strikes on a key Iranian gas field.

However, mutual strikes earlier had already caused a natural gas facility in Qatar to become paralyzed. Qatar’s Energy Minister and CEO of QatarEnergy, Saad Sherida al-Kaabi, said on the 19th that Iran’s attack affected 17% of Qatar’s liquefied natural gas export capacity, estimated to cause about $20 billion in annual revenue loss.

Key energy export routes in the Middle East remain uncertain, and energy price volatility at high levels will continue to be a core variable influencing the global economy and central bank policies.

(Editor: Wang Zhiqiang HF013)

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