US Fed’s & BSP’s high rates

History tells us that in a global recession, unemployment will be the worst consequence. It seems, in fact, that it happens every decade in modern times.   

In modern times (after WWII), the first to hit us was the Oil Crisis Recession in November 1973-March 1975 in the decade 1970s. Lasting 16 months, it was brought about by the quadrupling of oil prices. This led to stagflation (a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high).

In decade 1980s, we had the Iran/Energy Crisis Recession (July 1981-November 1982). It was caused by the regime change in Iran, the world's fourth-largest producer of oil then. Iran’s production cuts forced oil prices to go up. Consequently, both inflation and unemployment rates went up. 

In decade 1990s, we had the Gulf War Recession (July 1990-March 1991). Lasting 13 months, this resulted in the spike in oil prices as Iraq invaded Kuwait. As a result, there was a huge decline in manufacturing activities. Thus, unemployment rate rose.

In decade 2000s, the Great Recession (December 2007-June 2009) ensued. It was caused by the housing bubble in the USA which resulted to record foreclosures. Then, a financial crisis flung markets worldwide into a nosedive. This was also the time that oil prices rose to record highs in mid-2008 and then crashed towards the end of the year. As both manufacturing activities and demands for consumer goods in the USA slowed down, unemployment rate throughout the world skyrocketed.

Then, the COVID-19 pandemic induced recession (popularly referred to as the Great Lockdown) started on February, 2020. In the USA, it lasted only for two months (February to April, 2020).  According to USA’s National Bureau of Economic Research, it was the deepest but the shortest in US history. Likewise, the rest of the world felt it too within the next seven months from February, 2020.  Similarly, the Great Lockdown brought about rapid and high unemployment throughout the globe. 

Whether we, Filipinos, go or not on that empirical belief that it is part of a per decade business cycle, we don’t have to deal with that for the time being. Most likely though, we might be experiencing another one this decade. If that happens, it will be the first time in history that a global recession happened twice in the same decade.

 Pundits believe that it will, if rich countries will not change their approaches. Yes, blame it to the Russia-Ukraine War that inflation is at an all-time high. However, the real culprit, it seems, is the reaction of rich countries in fighting inflation.

No less than the UN Conference of Trade and Development (UNCTAD) confirmed this.  Recently, in its report it warned that “tightening monetary and fiscal policy, meant to fight inflation, in rich nations like the United States could cause global recession and stagnation.” 

It further said that the “worldwide damage could be worse than after the 2008 financial crisis and the Covid-19 nightmare.”

UNCTAD further stressed that the “Federal Reserve’s (USA) aggressive tightening policy has led the US dollar to appreciate to multi-decade highs, squashing currencies around the world.” Thus, “along with those of other central banks, risk pushing the global economy into recession.” 

It estimated that “each percentage-point increase in the Fed’s push to hike interest rates would lower the economic output of other rich countries by 0.5% and the economic output in less developed countries by 0.8% over three years.” Well, obviously, because a “strong dollar makes it more expensive for other countries to import essential items like food and fuel.” Apart from that, as developing or poorer countries are usually indebted in US dollars, debt servicing costs will surely balloon. 

As if the effect of these increases were not yet unbearable, the US Fed raised for the fourth consecutive time its rate by .75 percentage point last Wednesday.  Then, our Bangko Sentral ng Pilipinas reacted by announcing last Thursday that it shall increase its benchmark interest by 75 basis points. 

True enough, raising rates shall slow down inflation as borrowing will become expensive.  However, those who are already indebted, whether businessmen or ordinary workers with mortgages, will bear the burden of increased borrowing costs (as banks will be repricing borrowers’ loans). These are businessmen who are already suffering from the effects of the pandemic and workers who can ill afford their daily necessities. 

Thus, business expansions are stalled and some will fold up due to high debt-servicing costs.  Consequently, the economy shrinks and joblessness ensues.