The collapse of Walmart and Target in the stock market in recent days brings us to a new phase of the inflationary crisis that is rocking the economy. Consumers are increasingly unpredictable and it’s hard to imagine what households will react to the sharp rise in interest rates to come.
Large discount retailers usually take advantage of a slowing economy or high inflation. In principle, these companies should attract households looking for lower prices and post income increases because their stock market share price should continue to rise.
However, wage increases, necessitated by inflationary pressures and the labor shortage that also affects the United States, are lowering the profit margins of large corporations. The costs of large retailers are rising, especially as they are also being hit by a slowdown in supply chains.
Target announced a spectacular drop in its net income of 52% in its last quarter, and Walmart changed its forecasts for next year down, even as it predicts a slowdown in its profitability in the coming months.
Target fell 25% on Wednesday in the stock market. And Walmart fell 12% on Tuesday and 7% on Wednesday. Other discount retailers, such as Dollar Tree, Dollar General and Costco, also saw a sharp fall in markets during the week.
And with falling tech stocks year-to-date, sensitive to rising interest rates and a slowing economy, the New York market is now down nearly 20% in 2022. In Canada, the decline stock market is limited to 5% due to increase in energy stocks, which are galvanized by oil prices that exceed 100 dollars per barrel.
Will the worst ever come?
At home, the inflation rate rose to 6.8% in April, up a tenth of a point from March, when economists expected the price index’s consumption limit. Economists now seem to believe that inflation will rise even more in the coming months.
The worst is likely to come yet in the food sector, according to Jimmy Jean, chief economist of Desjardins, who is in Economy zone Wednesday night. Grocery prices rose 9.7% in April 2022 compared to April 2021, and this could rise further due to the sharp rise in import prices.
And since purchase contracts are negotiated on a long-term basis, it’s possible that the increases will be felt within a few months. Under the circumstances, Jimmy Jean said he expected the central banks may take it even more seriously than they did until now. In other words: interest rates will need to be raised faster to curb inflation, according to him.
This is a completely new situation. We have never been to a situation where we have to come back from a pandemic, where there are still logistical problems, where there are still countries struggling with pandemics and in a war context. It is very difficult to make forecasts in such an environment.
The pressures increase
It must be said that the economy is shaken in many ways:
the war in Ukraine and the sanctions against Russia led to a reduction or anticipation of a reduction in the supply of grains, wheat, cereals, natural gas and oil; the aggression, which continues and can last a long time, creates strong inflationary pressure;
the brutal lockdown in China slows down production and further disrupts supply chains, causing delays, delays, shortages, price increases; China is just beginning to revive business in Shanghai;
growth remains strong, despite declining economists, with the lowest unemployment rate; Savings levels have dropped, however, and the combination of runaway inflation with rapidly rising interest rates can only slow the growth of GDP.
Who do central banks work with?
Knowing that inflation is further fueled by a supply problem, is it really appropriate to raise interest rates drastically, which will affect demand? According to economist Joelle Leclaire, of Buffalo State Collegeguests as part of the podcast Question of interestthe approach of rate increases is completely counterproductive.
When we have good demand, when we have people who can form unions, who come together to push wage increases, and when, all of a sudden, we are told we need to raise the interest rate, raise the level. of unemployment, create a recession, have to wonder with whom the central bank is working.
Why raise interest rates? asked Joelle Leclaire. If we know that inflation comes from blocking the production chain, let’s attack the production chain! If we know that inflation comes from rising energy prices, we will attack the source of rising energy prices or change our energy production. That will reduce inflation. Rising interest rates are playing with fire! Many people will be hurt!
National Bank economist and strategist Martin Lefebvre, was also invited Question of interestwondering if central banks will be able to intervene without causing a recession. It is almost inevitable that, if we raise interest rates, it will eventually lead to a slowdown. The betting of the central banks is always to say that we can properly measure where we should stop. But, historically, they have hardly done so yet.
According to him, from 2023, the risks of recession will increase in Canada and the United States, due to the complex composition of inflation and the impact of rising interest rates.
Consumption is two-thirds of the economy. So far, we are seeing household confidence levels drop in Canada and the United States. The company’s profits are dwindling. Consumer spending may weaken and even decline. It seems pretty clear that the chain is leading us into an economic slowdown, possibly a recession.
Source: Radio-Canada
