Is Major Global Recession Knocking the door?
Global recession is scary. People lose jobs, businesses shut down, unemployment increases and living standards fall. But how do we define recession and what are the signs that it is around the corner? In general, a recession is defined as two or more consecutive quarters of negative economic growth or declining GDP (Gross Domestic Product). It is a period when a general decline is observed in national economies around the world. The previous recession was felt between 2007 and 2009. The impact and timing of the recession may vary from country to country.
US recession often leads to global recession as it happened in 2009. Now again, as per growing warnings from banks and economists, the US economy could be plunging into a recession next year. However, the major indicators of the economy such as job market and consumer spendings are strong, increasing worries that rising interest rates can result in a sudden retrenchment. Recession risks are high-uncomfortably high- and rising mentioned Mark Zandi who is chief economist at Moody’s Analytics
Signs Indicating Recession
Shrinking GDP: In the first quarter of the year from January to March, the GDP shrank by 1.4% if calculated annually which is a bad omen. According to a survey conducted by Bloomberg the estimated growth remained 1.1% over the period. First months of 2022 saw an increasing Omicron wave which quickly eased. However, inflation increased to a year over year pace of 8. 5% in March which is the fastest inflation since 1981.
Inflation: Inflation has remained about 40 -year highs and become a central challenge for the economy and US government. The higher prices of day-to-day basic things like food, energy and renting are shrinking American’s budgets, fogging their view of the economy. Fuel prices touched a new high this week. On the other hand, despite all these murky economic conditions, Americans haven’t changed their buying habits and are still spending heartly. No down trend was noticed in the sales of clothing, cars and furniture. In fact, a 0.9% increase in overall retail sales from a month earlier was noticed.
International Unrest: There is a risk of recession in Europe and China which is casting a shadow on the U.S economy. While strengthening the U.S, dollar makes dollar investment more lucrative it can affect the export negatively, strengthening the chances of a technical recession.
The fear of a turbulent economy and change in consumer pandemic spending habits forced big tech companies like Netflix and Peloton to cut their workforce recently. Twitter and Meta are not hiring anymore while Amazon stated that the company is overstaffed after months of rapid hiring. National claims for unemployment insurance increased upto 218,000 however, that is still near historic lows.
War and Covid Lockdown: In April, the Chinese economy was grim because of the lockdown in multiple cities. Retail sales were down 11.1% compared to the previous year which was the worst performance since March 2020. Lockdown not only forced the consumer to stay indoors and not shop but also had a negative impact on employment.
Russia and Ukraine are major commodity producers and war between them has caused huge disruptions resulting in soaring global prices, particularly that of natural gas and oil. They both contribute upto 30% of the global exports for wheat that led to jump in the food prices as well. The effect is being felt by the global economy which results in slower economic growth and higher inflation.
What Big Financial Firm Say: Biggest firms of America are at a crossroad whether these indicators mean recession or it is just a temporary phase of slowdown. Bank of America, Deutsche Bank, Goldman Sachs are among those prominent firms who forecasted the likelihood of a recession within the next 2 years.
Goldman Sachs: Goldman is of the opinion that it is very challenging to bring down high inflation and wage growth that will not cause a recession. Goldman Sachs economists said recently that the economy does not need a recession but probably do need growth.
Bank of America: As per Bank America researchers an inflation shock will cause a recession and equity bear market in 2022. “Inflation causes recession, and right now, inflation is out of control.” BofA was heard saying last month. Researchers observed that almost all prior recessions have been preceded by inflation surges, including in the late 1960s, early 1970s, and in 2008. Higher yield and weaker dollar are the last things that contribute to recession.
Deutsche Bank says that a recession is likely to be there by the end of 2023, and predicted that the trigger will be the Fed hiking interest rates Above 5%. “We will get a major recession, but our strongly held view is that the sooner and the more aggressively the Fed acts, the less longer-term damage to the economy there will be.” The bank said.
The economic experts counter that inflation will keep rising because of the hot labour market and supply-chain issues, pushing the Fed to act.
P Morgan declines any near-term recession. Though they forecast continued financial pressure on US households. “The Fed is going to fight inflation this year and likely into next, but there are many other ways for inflation to fall regardless of what happens to interest rates”, said Jacob Manoukian-head of investment strategy for J.P Morgan.
As per the Data obtained from J.P Morgan, 20% of people at the bottom have more money in their bank accounts than before the pandemic. Also, in lower paying jobs, the wage increment has been the fastest.
The researchers of JP Morgan and UBS are on the same page. Matthew Mish, head of credit strategy at UBS said that the inflation is not going to overwhelm Americans because of the savings they accrued during the pandemic. He also added that the growing bargaining power of service sector workers and increased debt may be temporary.
The UBS editorial team stated “Our base case is that inflation is likely to fall from current levels but remain above pre-pandemic ranges. We expect growth in 2022 to be slower than last year, but not tip over into recession.” Amidst ongoing war between Russia and Ukraine and other factors, the global economic situation is unpredictable. The stock markets reflect early warning signals and show the impact of economic downturns.
As per Deutsche Bank with the temptation of taking a slow path, people are hoping that the US economy would land softly on a sustainable path, which is not going to happen and their target is to minimise the economic, financial, and societal damage of prolonged inflation by not doing any mistake while doing too much.
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