The risk of recession is increasing in Europe and the United States

Deteriorating global economic conditions, rising inflation, and more restrictive monetary policy by central banks form an explosive cocktail that is beginning to plague economists and market strategists. They estimate that there is an increased risk of recession, perhaps as early as the end of 2022, in the United States in 2023. Western sanctions have been taken in addition to the supply disruption caused by the coronavirus. Against Russia in retaliation for the invasion of Ukraine. Enough to foster runaway inflation through soaring prices for energy, agricultural products, metals and electronic components.

In the euro area, the risk of a recession should increase by 30%, inflation should continue to rise by the end of the year, and the ECB probably this year, according to economists’ monthly Reuters survey released Thursday. In the fourth quarter of the year, it is possible that the rate hike cycle will begin before 2023.

Ukrainian war threatens eurozone economy

After the coronavirus omicron wave that causes COVID-19, forecasters, who were still hoping for a strong recovery in March, lowered their economic growth estimates for the quarter down to just 0.4%. This is less than half of what we expected. A month ago. After that, the growth rate is expected to drop to 0.6% in the third and fourth quarters. They currently expect eurozone GDP to grow from 3.8% and 2.5% a month ago to 2.9% this year and 2.3% in 2023.

Economists also estimate that there is a 30% chance of a recession in the euro area this year, emphasizing that the region is particularly exposed to the conflict between Russia and Ukraine. Gordon Scott, an economist in the euro area at RBC, said, “There is a risk that the economic impact of the war will be a little worse than expected, or the situation will get worse,” and the possibility of a recession remains high. Added. ..

Of the 39 economists surveyed, 37 said the worsening war in Ukraine was the greatest risk to the eurozone economy over the next 12 months. Only two of them have positioned the possibility of a recurrence of the COVID-19 epidemic as the main risk.

Risk of US recession in 2023 if Fed misses soft landing

On the other side of the Atlantic, economists have also significantly lowered their growth forecasts for 2022 and 2023, saying that the risk of a recession is real if the Federal Reserve has to raise key interest rates more than expected. Some people think. To curb persistent inflation at too high a level.

In March, Goldman Sachs also mentioned the possibility of a recession in 2023 with a 20% to 35% chance. Deutsche Bank expressed further concern this week, saying the economist said the Fed’s future aggressive tightening of monetary policy should put the US economy in recession within 18 to 24 months.

In a report released Tuesday, DB Chief Economist Matthew Luzetti said, “I no longer believe the Fed can adjust its soft landing. Instead, more aggressive monetary tightening puts the U.S. economy in recession. I expect to drive it in. ” German banks are seeing the Fed raise 50 basis points (bps) at each of the next three meetings. After that, it tends to continue to reach 3.50% next year.

On March 16, the Fed will raise the federal funds rate by 25 bp to 0.25% to 0.50%, with a median forecast of about 2% by the end of 2022 and 2.8% by the end of 2023. The central bank also plans to reduce its balance sheet by more than $ 1.1 trillion annually ($ 95 billion per month). This is equivalent to a second level of monetary tightening.

Bank of America fears “recession shock”

Bank of America showed on Friday that the macroeconomic environment is rapidly deteriorating and could put the US economy in recession against the backdrop of monetary tightening. BofA strategists refer to the “recession shock.” “The” inflation shock “has worsened as the” interest rate shock “has begun and the” recession shock “has arrived,” said Michael Hartnet, chief investment officer of the bank. According to him, cash, volatility, commodities and cryptocurrencies could outpace bonds and equities in the future.

Finally, Goldman Sachs chief economist Janhatzius quoted Bloomberg on Friday that the Fed will need to raise the federal funds rate to more than 4% next year if finances don’t improve. I estimated. And the labor market remains “hot” as well. “If the economy doesn’t slow down, especially if employment growth doesn’t slow down significantly, we can expect a significant increase of over 4%,” said an economist. “Bloomberg”. These levels of short-term interest rates can curb growth and cause a recession.

Finally, in a recent study at Harvard University, former Treasury Secretary Larry Summers and researcher Alex Domash said that the unemployment rate of less than 4% with inflation close to 8% in the United States is “the next 12-24? Moon”. The unemployment rate in the United States fell to 3.6% in March, but the Consumer Price Index (CPI) for March, released on April 12, is expected to be around 8.3% annually.