Every month, Mint’s Plain Facts section brings out an update on key global economic data to thread together the biggest developments in the world that are worth paying attention to. The accompanying analysis and charts explain how each story is creating ripples on the global stage, where it is headed in the coming weeks, and whether it can impact India. This time, we explain why the Bank of Japan has ended a long era of negative interest rates and what is causing financial stress to citizens of several countries.
Every month, Mint’s Plain Facts section brings out an update on key global economic data to thread together the biggest developments in the world that are worth paying attention to. The accompanying analysis and charts explain how each story is creating ripples on the global stage, where it is headed in the coming weeks, and whether it can impact India. This time, we explain why the Bank of Japan has ended a long era of negative interest rates and what is causing financial stress to citizens of several countries.
1. Japan’s pivot
It took two years for Japan to do what nearly every country in the world had already done—raise key policy interest rates to tame inflation. The country’s central bank raised its benchmark rate from (-)0.1% to a range of 0–0.1% as inflation repeatedly came in above the target of 2%. While other countries sharply cut their interest rate during the covid-19 pandemic, Japan’s decision to cut its interest rate to (-)0.1% had come way back in 2016, intending to stimulate its struggling economy. The interest rate remained negative for eight years even as the country lost its tag of the world’s third-largest economy to Germany. High inflation in Japan has put the country in a tough spot now as economic activity continues to be weak and the hike in the interest rate, maybe the only one, could further impede the country’s efforts to sustain its mark on the world economy.
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1. Japan’s pivot
It took two years for Japan to do what nearly every country in the world had already done—raise key policy interest rates to tame inflation. The country’s central bank raised its benchmark rate from (-)0.1% to a range of 0–0.1% as inflation repeatedly came in above the target of 2%. While other countries sharply cut their interest rate during the covid-19 pandemic, Japan’s decision to cut its interest rate to (-)0.1% had come way back in 2016, intending to stimulate its struggling economy. The interest rate remained negative for eight years even as the country lost its tag of the world’s third-largest economy to Germany. High inflation in Japan has put the country in a tough spot now as economic activity continues to be weak and the hike in the interest rate, maybe the only one, could further impede the country’s efforts to sustain its mark on the world economy.
2. Looking up
A technical recession in the UK by the end of last year brought worries over a global slowdown but the new year may be different. The UK economy grew 0.2% in January on the back of sharp recovery in spending, ending fears of a long-term recession. Earlier, the economy had entered a technical recession, which is two consecutive quarters of decline in the GDP, with its economy shrinking 0.1% in July-September and 0.3% in October-December. However, January’s print has brought back hopes and high-frequency data suggests the economic activity is expected to have remained on the same lines in February and March. The February figure, due later this week, may hold cues on whether January’s rebound was an aberration or a real turnaround. While the country won’t lose its technical recession tag until the release of January-March data in May, signals of recovery may prove helpful for Rishi Sunak’s government, which is facing criticism over economic slowdown and high inflation.
3. Boeing’s blunders
The visuals of a door of an Alaska Airlines flight blown out mid-air sent shockwaves around the world, raising the heat on the aircraft’s maker Boeing Co. Since the 5 January incident on a 737 MAX 9, the company’s share price has crashed nearly 25%. However, this is only one of several incidents that have led to a closer scrutiny and negative impact on the company. From the grounding of aircraft due to safety concerns, a fracture in a cockpit window, a penalty for arms exports violation, and the suspicious death of a whistleblower, to investigations into quality control of aircraft, Boeing has seen several adverse incidents in the past few months. This has resulted in the announcement that chief executive officer Dave Calhoun will step down at the end of 2024. Since Boeing is one of the only two aircraft manufacturing companies, the chaos threatens to impact the airline industry as a whole.
4. Hardening yields
At a time when the economic slowdown is proving to be a global worry, the US is continuously surprising with strong data—though not without its drawbacks. With solid jobs figures and stronger-than-expected manufacturing data, the hopes of rate cuts have diminished, resulting in a hardening of the bond yields. The US Federal Reserve had raised hopes late last year when it said 2024 would see an easing in monetary policy, with three rate cuts. While the Fed has maintained the stance that monetary policy will be eased by the end of this year, analysts are taking a cautious approach, with many believing that a rate cut amid strong economic activity may stoke inflationary pressures. With inflation continuing to stay above the Fed’s target of 2%, markets expect a more gradual process of monetary policy easing. This is reflecting in the 10-year bond yield, which has risen to its highest since November.
5. Price pinch
Inflation may no longer be spiralling out of control in double digits, but its impact is still fresh across the world. According to CNBC’s “International Your Money Financial Security Survey”, most adults in several countries such as Germany, the US, and the UK say they are worried over their personal finances, with inflation being the leading contributor to the problem. In the past few years, supply-chain issues, wars and shortage of food production have led to sharp rises in prices. While the pace has eased, the costs remain significantly above the levels seen a couple of years ago. Apart from food and fuel prices, soaring rents have also stoked a global cost-of-living crisis. The World Economic Forum in a report last year noted that the persistence of such a crisis “could result in a growing proportion of the most vulnerable parts of society being priced out of access to basic needs, fueling unrest and political instability”.
