- Around the world, markets are flashing warning signs that the global economy is teetering on a cliff’s edge.
- The question of a recession is no longer if, but when.
- Much needs to be done to combat the impending crisis.
Over the past week, the pulse of those flashing red lights quickened as markets grappled with the reality — once speculative, now certain — that the Federal Reserve will press on with its most aggressive monetary tightening campaign in decades to wring inflation from the US economy. Even if that means triggering a recession. And even if it comes at the expense of consumers and businesses far beyond US borders. There’s now a 98% chance of a global recession, according to research firm Ned Davis, which brings some sobering historical credibility to the table. Let’s unpack five key trends:
The Herculean US Dollar
The US dollar plays an outsized role in the global economy and international finance. And right now, it is stronger than it’s been in two decades. The simplest explanation comes back to the Fed. When the US central bank raises interest rates, as it has been doing since March, it makes the dollar more appealing to investors around the world. In any economic climate, the dollar is seen as a safe place to park your money. In a tumultuous climate — a global pandemic, say, or a war in Eastern Europe — investors have even more incentive to purchase dollars, usually in the form of US government bonds. The dollar’s strength also creates destabilizing effects for Wall Street, as many of the S&P 500 companies do business around the world. By one estimate from Morgan Stanley, each 1% rise in the dollar index has a negative 0.5% impact on S&P 500 earnings.
Hampering Economic Engine
The No. 1 driver of the world’s largest economy is shopping. And America’s shoppers are tired. After more than a year of rising prices on just about everything, with wages not keeping up, consumers have pulled back. “The hardship caused by inflation means that consumers are dipping into their savings” EY Parthenon Chief Economist Gregory Daco said in a note Friday. Once again, the reason behind the pullback has a lot to do with the Fed. Interest rates have risen at a historic pace, pushing mortgage rates to their highest level in more than a decade and making it harder for businesses to grow. Eventually, the Fed’s rate hikes should broadly bring costs down. But in the meantime, consumers are getting a one-two punch of high borrowing rates and high prices, especially when it comes to necessities like food and housing.
American Corporates Tighten Their Belts
Business has been booming across industries for the bulk of the pandemic era, even with historically high inflation eating into profits. That is thanks (once again) to the tenacity of American shoppers, as businesses were largely able to pass on their higher costs to consumers to cushion profit margins. But the earnings bonanza may not last. In mid-September, one company whose fortunes serve as a kind of economic bellwether gave investors a shock. FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand was softening, and earnings were likely to plunge more than 40%. And just ahead of the holiday season, when employers would normally ramp up hiring, the mood is now more cautious. “We’ve not seen the normal September uptick in companies posting for temporary help” said Julia Pollak, chief economist at ZipRecruiter. “Companies are hanging back and waiting to see what conditions hold.”
Entering a Bear Market
Wall Street has been hit with whiplash, and stocks are now on track for their worst year since 2008 — in case anyone needs yet another scary historical comparison. But last year was a very different story. Equity markets thrived in 2021, with the S&P 500 soaring 27%, thanks to a torrent of cash pumped in by the Federal Reserve, which unleashed a double-barreled monetary-easing policy in the spring of 2020 to keep financial markets from crumbling. The hangover has been brutal. The S&P 500, the broadest measure of Wall Street — and the index responsible for the bulk of Americans’ 401(k)s — is down nearly 24% for the year. And it’s not alone. All three major US indexes are in bear markets — down at least 20% from their most recent highs. On Wednesday, the yield on the 10-year US Treasury briefly surpassed 4%, hitting its highest level in 14 years. That surge was followed by a steep drop in response to the Bank of England’s intervention in its own spiraling bond market — amounting to tectonic moves in a corner of the financial world that is designed to be steady, if not downright boring.
Adverse Impact of International Events
Nowhere is the collision of economic, financial, and political calamities more painfully visible than in the United Kingdom. Like the rest of the world, the UK has struggled with surging prices that are largely attributable to the colossal shock of Covid-19, followed by the trade disruptions created by Russia’s invasion of Ukraine. As the West cut off imports of Russian natural gas, energy prices have soared and supplies have dwindled. European gas prices have surged. Two years ago, Dutch natural gas futures, the European benchmark, cost $15.48 per megawatt hour. This week, the price was nearly 12 times higher. The freshly installed government of Prime Minister Liz Truss announced a sweeping tax-cut plan that economists from both ends of the political spectrum have decried as unorthodox at best, diabolical at worst. Britons, who are already in a cost-of-living crisis, with inflation at 10% — the highest of any G7 economy — are now panicking over higher borrowing costs that could force millions of homeowners’ monthly mortgage payments to go up by hundreds or even thousands of pounds.
The Ride Uphill
While the consensus is that a global recession is likely sometime in 2023, it’s impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the 2007-09 Great Recession, but every recession is, of course, painful. Some economies, particularly the United States, with its strong labor market and resilient consumers, will be able to withstand the blow better than others. “We are in uncharted waters in the months ahead” wrote economists at the World Economic Forum in a report this week. But there are some silver linings, they said. Crises force transformations that can ultimately improve standards of living and make economies stronger.
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Source: CNN
