BEIJING, May 28 (APP): The increase in consumer prices and high interest rates in the US will change the whole dynamics.
While right now, the impact of high interest rates has not come to small business owners and real estate owners, because the debt contracts they had are not up for re-pricing. But when re-pricing kicks in later this year, it will be a hit to the consumers.
These views were expressed by Ali Farid Khwaja, Chairman of Pakistan-based KTrade Securities in an interview with China Economic Net (CEN).
Earlier this month, statistics from Challenger, Gray & Christmas, Inc. show that U.S. companies scaled back hiring plans in April, with 9,802 new hires announced, the lowest for April since 2013.
As labor costs continue to rise, companies will be slower to hire, and we expect further cuts will be needed. This low April figure may be the calm before the storm, senior Vice President Andrew Challenger said in a statement.
Small and medium businesses will bear the brunt due to the compounding impact of high inflation in the mass market.
Inflation effects add up, and when things become just too expensive that people start cutting down on expenditure and businesses cut down on new hiring, a recession is in sight. Next year, when people try to remortgage their homes, they will find it very expensive as 7% is a very high-interest rate, Ali Farid Khwaja said.
I don’t think there will be a rate hike, but the longer rate cuts are delayed, the greater the risks are for the overall system, he added.
The reason why the world had a period of low inflation and high growth was because of the benefit of trade. Yet over the last 5 years, protectionism has led to lesser trade, higher tariffs on consumption, and higher fuel prices, all of which have contributed to higher inflation, Ali Farid Khwaja said.
According to Dr. Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute (SDPI), it also means outstanding problems to the ensuing government, which can undermine policy predictability and certainty.
If high inflation persists, the next government would find it extremely challenging to meet the economic expectations of their voters, he said, adding that the first thing the new US administration might do after the election is to reassess the real value of USD.
As the US inflation waves are getting higher for longer, it is the developing world that’s stricken the hardest.
Keeping the interest rate higher for secondary capital is creating a massive trade issue for the global economy, especially for Asian markets, said Ali Farid Khwaja.
Costs of debt servicing are soaring. In particular, currencies across Asian markets, including Malaysia, Indonesia, Thailand and India, are at historic lows. In some cases, central banks had to intervene to defend their currencies.
It has two options, in my opinion, Dr. Abid Qaiyum Suleri said, One is to depreciate the value of the US dollar vis-a-vis other major currencies, which is a step no outgoing government would like to take.
Otherwise, the US itself is becoming more and more trade non-competitive, not only against China but also against the EU, Japan and other trading nations, he said.
APP/asg