Top economics news: US bear market; ‘Crypto winter’ on way?

US stock markets tumbled this week, entering a ‘bear market’ – meaning share values have fallen at least 20% from recent highs. Stocks on the benchmark S&P 500 index dropped by 3.9% on 13 June because of fears over rampant inflation, putting them 21.8% below levels on 3 January.

The US Federal Reserve made its biggest increase to interest rates since 1994, with a 0.75% rise as it looks to tackle inflation, reports Bloomberg. US consumer prices are climbing at their fastest annual rate in over four decades, with gasoline prices hitting a record high and food costs soaring. Consumer prices rose by 8.6% in May – the largest year-on-year increase since December 1981 – following an 8.3% jump in April. Interest rates could go up by a further 0.75% or 0.5% next month, Fed Chair Jerome Powell says.

The European Central Bank will raise its key interest rates by 0.25% in July and plans further increases later this year, as it tries to tackle inflation, the BBC reports. The bank has lifted its estimate for annual inflation to 6.8% this year and cut its eurozone growth forecast for 2022 to 2.8% from 3.7%.

The UK’s central bank is expected to raise interest rates for the fifth month in a row on 16 June, Bloomberg reports. Investors and economists predict a 0.25% increase in the key rate, pushing it to a 13-year high of 1.25%. Brazil and Hong Kong, SAR China, have also raised interest rates this week.

The UK’s economy shrank in April, with GDP contracting by 0.3% after falling by 0.1% in March – the first back-to-back declines since the start of the COVID-19 pandemic. The news follows estimates from the Organisation for Economic Co-operation and Development that the UK economy will stagnate next year, with 0% growth, making it the slowest-growing economy in the G7.

China’s economy faces further disruptions, as the country is reimposing COVID-19 restrictions just weeks after relaxing rules in key cities. Most economists predict China will fail to meet its growth target for this year, as its zero-COVID strategy leaves it “stuck in a cycle of disruptive shutdowns and reopenings that hint at lingering economic pain”, Bloomberg says.

A nationwide trucker strike threatens to rock South Korea’s economy and global supply chains, Bloomberg reports. The country’s vehicle, petrochemical, steel and other key industries have already faced production disruptions worth $1.2 billion, the Ministry of Trade, Industry and Energy says, with deliveries of automobiles, fuels and materials for semiconductor chips among those suspended or delayed. The strikes are in protest against the ending of a minimum wage scheme amid soaring fuel prices.

Japan’s trade deficit – when the value of imports exceeds the value of exports – hit a more than eight-year high in May. The deficit rose to $17.8 billion as imports grew by 48.9% on the year and exports rose by 15.8%, Reuters reports. The increase was down to high commodity prices and a weakening yen – trends covered in our economics roundup last week.

Russia has cut its key interest rate to 9.5% as inflation slows and the rouble strengthens, Reuters reports. The central bank has been lowering rates since an emergency hike to 20% after Moscow’s invasion of Ukraine on 24 February triggered unprecedented Western sanctions. The rouble now stands at around 57 against the dollar, after hitting a record low of 121.53 in March.

The rouble’s rise is linked to surging oil prices. Despite many Western countries moving away from Russian oil, the country made almost $100 billion from oil and gas exports during the first 100 days of its war on Ukraine, with the EU accounting for 61% of this, according to the Centre For Research on Energy and Clean Air.

Sri Lanka faces a potential humanitarian disaster because of its economic crisis, the UN humanitarian office OCHA says. There are severe shortages of medicines, fuel and other essentials amid record inflation and a devaluation of Sri Lanka’s currency, Reuters reports.

The country is suffering its worst economic downturn since gaining independence in 1948, with the Sri Lankan rupee having depreciated by 80% since March and food inflation running at 57.4%, the OCHA says. The UN plans to provide $47.2 million of assistance over the next three months to the 1.7 million people worst hit by the crisis, following a request from the Sri Lankan government.

“Sri Lanka’s once-strong healthcare system is now in jeopardy, livelihoods are suffering and the most vulnerable are facing the greatest impact,” UN Resident Coordinator in Sri Lanka Hanaa Singer-Hamdy says. “The UN and humanitarian partners are calling on donors, the private sector and individuals to urgently support this plan to provide life-saving assistance.”

Half of the country’s children need some form of emergency assistance – including nutrition and healthcare – and 70% of households have reduced their food consumption, UNICEF representative in Sri Lanka Christian Skoog says.

Cryptocurrency markets wobbled again this week, following a market crash in May. Bitcoin fell by 15% on 13 June – its biggest one-day drop since March 2020 – after major US crypto lender Celsius Network halted withdrawals and transfers because of “extreme” market conditions, Reuters reports. This pushed total cryptocurrency values below $1 trillion for the first time since January 2021 and led to fears that the downturn might impact other assets.

Crypto exchange Coinbase announced plans to lay off 18% of its staff because of a potential ‘crypto winter’. CEO Brian Armstrong said in a message to staff: “We appear to be entering a recession after a 10+ year economic boom. A recession could lead to another crypto winter and could last for an extended period. In past crypto winters, trading revenue (our largest revenue source) has declined significantly.”

El Salvador – the first country to make bitcoin legal tender, in September 2021 – dismissed concerns that a sharp drop in the value of bitcoin could damage the Central American country’s fiscal health. Finance Minister Alejandro Zelaya brushed off comments from German state-owned broadcaster Deutsche Welles that the country’s bitcoin portfolio had lost $40 million in value, saying that this “does not even represent 0.5% of our national general budget”. Bitcoin’s value has halved since it became legal tender in El Salvador.

Carbon pricing is one of the best policy tools to redirect spending towards cleaner forms of energy, but many countries are reluctant to try it, an IMF blog says. Could an agreement on an “international carbon price floor” change things?

A VoxEU column also picks up on carbon taxes, saying they can alter behaviour by affecting social norms. “Conspicuous peer behaviour influences some consumption decisions such as energy conservation, or adoption of renewable energy technologies,” it adds.

You’ve probably heard of first-mover advantage, but what about second-mover advantage? It helps many businesses because of what ‘followers’ can learn from first movers – and can even lead to firms delaying market entry, an NBER working paper says.