The US, Europe and China face the risks of a recession at the same time

The approaching winter risks being very cold because of a triple traffic jam.

Thomas Osborne
Thomas Osborne
03 September 2022 Saturday 21:43
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The US, Europe and China face the risks of a recession at the same time

The approaching winter risks being very cold because of a triple traffic jam. Until now, the global economy could count on three engines: the US, the countries of the eurozone and China. However, the current situation with the energy crisis, the rise in inflation, the war in Ukraine and the upward turn of the monetary policy cycle, the three locomotives will stop going at full speed in the coming months. Or they will even be blocked.

“Although it does not occur in a synchronized way, the eventual contraction could overlap between the different areas during this period. And it is something that has not happened since the Great Recession of 2008 ”, warns analyst Juan Ignacio Crespo. "Recession risks are piling up around the world," said Seth Carpenter, chief economist at Morgan Stanley. A few days ago, the Nomura bank issued its warning: the eurozone, the United Kingdom, Japan, South Korea, Canada and Australia will experience a recession in the next 12 months. "There are signs that the world economy is entering a synchronized growth slowdown, which means that different areas will not be able to count on exports to rebound," analysts Rob Subbaraman and Si Ying To wrote.

Since October, the IMF has not stopped revising its forecasts downwards. And he assures that we are heading for one of the worst scenarios of the last 50 years. “The world may soon be on the verge of a recession, just two years after the last one. In a scenario of complete suspension of the flow of Russian gas to Europe, inflation will increase and global growth will slow further, to about 2.6% this year and 2% next year, a pace below which growth it has fallen only five times since 1970. In this case, both the United States and the euro area experience almost zero growth next year, with negative spillover effects for the rest of the world,” Pierre-Olivier Gourinchas wrote in late July. , from the IMF think tank.

The US is already technically in recession (pending official confirmation). Its unemployment rate remains historically very low (3.7%), but it has also started to rise. Statistical note: since 1955, every time inflation has been above 4% and unemployment below 5%, – like now – the US economy has entered negative territory. And the invested yield of the bonds (the two-year one yields more than the 10-year one, when discounting short-term risks) also tends to lead to a contraction over time.

In Europe. Bank of America analysts say that "a technical recession between the fourth quarter and early 2023 and gas rationing in certain countries (Germany in particular) are now part of our base case."

As for China, it is true that it has not fallen into recession, not even in the years of the global financial crisis. However, an expansion of the order of 3% is a symptom of extreme weakness for the parameters of the Asian giant, where the confinements due to covid do not cease and the threat of a bursting of the real estate bubble (the case of Evergrande) could have consequences disastrous. This year, China may mark the lowest growth in four decades, if the pandemic is excluded.

Other indicators to take into account for the most pessimistic: the price of copper, which has fallen by more than 20% this year, is the sign of the decline in raw materials that anticipates recessions, while manufacturing production in Europe is heading towards a contraction. “Even if the war in Ukraine ended and inflation subsided, the world economy would still have to endure the withdrawal of the colossal stimulus, some $12 trillion that states and central banks poured into the economy in the past two years, and this will inevitably take its toll”, recalls Crespo.