Everyone is pessimistic these days. Stephen Blitz of investment research firm TS Lombard said on July 14, a day after Bank of America made similar remarks, that he expects a recession in the world's largest economy this year. Another bank, Goldman Sachs, expects eurozone GDP to decline in both the third and fourth quarters of this year. Americans are conducting more Google searches for “recession” than ever before. Traders are selling copper (a proxy for industrial hygiene), buying dollars (a sign of nervousness) and pricing in a rate cut in 2023.
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Many factors combine to create a toxic mixture. In response to the COVID-19 pandemic, the United States overstimulated the economy, causing inflation within and across its borders as consumers' voracious demand for goods disrupted global supply chains. Ta. China's attempts to eradicate the coronavirus have exacerbated these problems. After that, Russia's invasion of Ukraine caused the prices of primary products to soar. In response to subsequent inflation, around four-fifths of central banks around the world raised interest rates by an average of 1.5 percentage points. After its meeting ended on July 27, the Fed raised interest rates by three-quarters of a point, the fourth time this cycle.
At the root of economic recession concerns is fear of the impact of monetary tightening. It is clear that central banks must take the proverbial punchbowl away from the party. Wage growth in the rich world is far too strong given weak productivity growth. Inflation is too high. But the risk is that higher interest rates could end the party entirely, rather than dampen it. History is not bright in this regard. Since 1955, there have been three times when U.S. interest rates rose as high as expected until this year: 1973, 1979, and 1981. In each case, the recession followed within six months.
Is there another recession? The economies of rich countries, which account for 60% of global GDP, have certainly slowed since the heady days of mid-2021, when coronavirus restrictions were being lifted. Goldman Sachs produces the Current Activity Index, which measures the health of the economy at high frequency based on a variety of indicators. The gauge has slowed in recent weeks (see chart 1). A survey of factory managers in the United States and the euro zone by data provider S&P Global suggests that the picture for manufacturing is bleaker than ever since the early days of the pandemic.
But even if, as some expected, statisticians revealed after the July 28 report that the U.S. GDP contracted for the second consecutive quarter from April to June, it would be difficult to declare a recession. seems too early. According to some rules of thumb, this is considered a recession, but not necessarily according to other rules of thumb. Despite the economy's strong fundamental performance, a series of strange developments caused GDP to contract in the first quarter. Also, it is probably too early for the Fed's tightening to have any effect.
Most economists look to the National Bureau of Economic Research (NBER) to find out whether the economy is truly in recession. The Business Cycle Dating Committee considers indicators beyond GDP, such as employment numbers and industrial production, when making its decisions. The Economist took a similar approach, with some speculation, for the wealthy world as a whole. Many indicators still point to expansion (see chart 2). It's hard to argue that a recession has arrived.
But growth is clearly slowing, and the big question is how bad things will get. The few remaining optimists point to the strength of households and businesses. The public is more pessimistic about the economy than during the depths of both the global financial crisis and the pandemic (see Figure 3). But wealthy global households probably still have around $3 trillion in “excess” savings accumulated during the pandemic. According to the JPMorgan Chase Institute, a banking think tank, cash balances among poor households in the United States increased by 70% in March compared to 2019.
Furthermore, people seem to have more confidence in their personal finances than in their financial situation. Households across the EU have increased by around a third on average to be positive about their finances since data began in the mid-1980s. In the United States, the percentage of people who think they won't be able to meet their debts within the next three months is unusually low. Consumer spending trackers such as Bank of England (UK) and JPMorgan Chase (US) still look pretty solid.
The government is also distributing funds to help poor people cope with rising energy prices. In the euro area, governments are providing economic stimulus equivalent to about 1% of GDP. Britain provided benefits to poor households. In May, the think tank Institute for Fiscal Studies estimated that such spending would almost offset the rise in the cost of living for the poorest households (although retail energy prices are now likely to rise further).
You can rest assured that the company will respond. Across wealthy economies, job openings remain near record highs. In Australia, employment is more than double pre-pandemic levels, according to data from employment website Indeed. In America, for every unemployed person he has two or more open positions.
As a result, the labor market remains tight. If you squint, you can find evidence that unemployment is rising in the Czech Republic. But overall, unemployment rates across the OECD club of mostly rich countries are lower now than they were just before the pandemic. In half of OECD countries, the proportion of working-age people in work, a broad measure of labor market health, is at an all-time high. If history is any guide, these numbers contradict an impending recession.
fear, anxiety, doubt
In the past, declining investment has had a major impact on economic downturns. During recessions in the G7 group of economic powers since the 1980s, about half of the decline in total GDP in negative quarters was due to reductions in capital investment. Data compiled by JPMorgan for the US, eurozone and Japan shows investment data is weaker this time around, but not catastrophically so.
Until recently, capital spending was booming as companies invested heavily in remote work technology and strengthening their supply chains. Some believe they are currently over-investing in capacity. Some people want to save cash. Investment in the G7 could fall at an annual rate of about 0.5% in the second half of this year, according to an analysis of research evidence, credit conditions and corporate liquidity by consultancy Oxford Economics. That's not good, but it's not enough to cause a recession. The decline in investment during past economic downturns was even greater.
Unfortunately, there are limits to the confidence that good economic indicators can provide when investors' underlying fear is monetary tightening. It seems that any type of news could convey bad news about the recession. The weak numbers confirm that a recession is on the horizon. Robust data, including wage increases, suggest central banks have not succeeded in slowing things down and further tightening is needed, which could result in a recession. Only when there are signs of declining inflation will fears of a recession truly be alleviated.
There is some relief ahead. Indicators of supply chain disruption, including global transportation costs, compiled by the New York Fed have eased. U.S. gas prices are currently down 3% on the week. Consultancy Alternative Macro Signals builds a “News Inflation Pressure Index” that shows whether the flow of news stories suggests price pressures are rising. The US and UK indexes have fallen recently.
But hopes that inflation will fall quickly are almost certain to be dashed. Past increases in food and energy prices have not yet been fully reflected in headline inflation. Morgan Stanley expects inflation among the wealthy to peak at 8% in the third quarter of 2022. Wage growth shows little sign of easing. Companies still discuss on earnings calls how best to pass higher costs on to customers.
The wealth of data facing economists is helpful, but the old lesson may still be that recessions are difficult to identify in real time. According to this study, the US economic downturn due to the global financial crisis began in December 2007. Even in August 2008, Fed staff believed the economy was still growing at about 2% per year. The post-lockdown situation is particularly difficult to interpret. Few expected labor shortages to materialize last year or for inflation to worsen in 2022.
So is pessimism. The reason for optimism is that the current monetary tightening is only just beginning. There is time for more surprises, even positive surprises, before the unstable global economy descends into serious trouble. â–
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