The global economy is spooked right now, as ominous clouds hang on the horizon amid warnings we are now “definitely” headed for a recession.
Markets have tumbled globally in the past few days – and America’s stock exchange looks to be next in line – because of the latest inflation figures stemming from the US.
Released on Friday, they showed that the cost of everyday goods has risen to a 41-year high.
The initial look at first quarter U.S. gross domestic product (GDP) was -1.4%, increasing fears that a recession could be a nearer proposition than many had thought. Meanwhile, high inflation is dampening consumers’ moods, while the Russian invasion of Ukraine has pushed oil prices higher worldwide.
“The Fed has a narrower path to be able to address inflation and not kick us into a recession,” says Mace McCain, chief investment officer at Frost Investment Advisors. “If the Fed were to follow through on these forecasted rates, we think the risk of a recession would be much higher than the market currently expects and could represent significant downside risks.”
Perhaps the biggest concern of experts who see a potential recession coming are the big changes in the Federal Reserve’s strategy. After playing down inflation for much of 2021, the Fed has finally found religion when it comes to getting price growth under control.
The Fed started preparing markets for tighter monetary policy in January when Fed Chair Jerome Powell said the central bank would lower its $9 trillion balance sheet in 2022 and begin the process of withdrawing cheap money from the economy.
This put pressure on stocks across the board—especially high-flying tech companies that thrive in such an environment.
U.S. investment firm PIMCO warned on Wednesday that central banks tightening monetary policy to fight persistently high inflation raised the recessionary risk.
There is a 40% chance of a U.S. recession over the next two years, with a 25% chance of that happening in the coming year, a Reuters poll found earlier this month.
“Stagflation, which is characterised by persistent high inflation, high unemployment and weak demand, has become the dominant risk theme since late 1Q22 and a plausible potential risk scenario,” said Fitch Ratings in a report released this week.
A string of recent data globally showed policymakers are walking a tight rope as they try to defuse inflation pressures without tipping their economies into a steep downturn.
Economists are widely calling for a return to growth this quarter, thereby avoiding the two consecutive quarters of negative GDP growth that constitute a technical recession, but a growing wave of experts have warned odds of a recession next year are growing.
In a research note on Monday, analysts at S&P Global Ratings said aggressive Federal Reserve policy to combat ongoing price spikes will usher in low economic growth this year and potentially risk a recession, warning: “What’s around the bend next year is the bigger worry.” S&P put the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week.
Wells Fargo expects a mild recession to occur in the second quarter of 2023, though strong household finances and solid consumer and business balance sheets should keep such a downturn, if it occurs, fairly tame, Seery said.
While a recession is commonly defined as two consecutive quarters of GDP declines, that’s not a hard-and-fast rule, especially for the folks who make the official determination.
The National Bureau of Economic Research, the arbiter of US recessions, considers a range of indicators in addition to GDP performance and defines a recession as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The advance estimate for second-quarter GDP performance is scheduled for release on July 28.