A Pandemic And War Push The World On The Brink Of A Recession

According to economists polled by The Wall Street Journal this month, the risk of the economy going into recession in the next 12 months is 28%, up from 18% in January and just 13% a year ago.

Last week, Deutsche Bank's senior economists David Folkerts-Landau and Peter Hooper became the first large bank to predict a recession, stating: "Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have caused us to revise down our forecast for global growth significantly. We are now projecting a recession in the US and a growth recession in the euro area within the next two years."

Inflation Is Still The Most Serious Economic Threat

Economists estimate that inflation will stay persistently high, with an average rate of 7.5% in June 2022, easing to 5.5% by December. Inflation is expected to drop to 2.9% by late 2023, putting it within close reach of the Federal Reserve's 2% target.

  • The largest inflationary threat is wage growth or a tight labor market
  • A wage-price spiral would lead workers to obtain greater pay to keep up with growing costs, and corporations to respond by raising prices even more
  • Some economists believe the Fed will have to hike rates sufficiently to produce a recession in order to break the inflation cycle

Philip Marey, senior U.S. strategist at Rabobank: “The Ukraine crisis will cause another boost to inflation in the near term, but the wage-price spiral that has started already is a more permanent threat to price stability,”

  • Despite the increased likelihood of a recession, 63% of economists polled by the Wall Street Journal believe the Fed will be able to control inflation without sparking a recession, a "soft landing," as economists describe it

The War In Ukraine Pressures Europe Energy Security

The conflict in Ukraine has added to the stress on European energy markets, which were already rattled by COVID-19's rippling effects.

Russia's crude and petroleum product exports to Europe constitute the second biggest bilateral flow of oil between two trade partners, and Europe relies on Russia for 40% of its gas. This year, the EU wants to reduce it by two-thirds.

Alternative supplies aren't going to be available anytime soon. According to Berlin, Germany may not be able to survive without Russian gas until the middle of 2024, hereby exposing companies and the wider economy.

  • Germany's engineering and chemicals associations have lowered or abandoned their growth forecasts for this year
  • Rising energy prices could lead factories having to reduce working hours
  • Additionally, it raises the risk of companies transferring manufacturing overseas to save costs

Siegfried Russwurm, chairman of Thyssenkrupp and head of Germany's BDI industry association: "Rising electricity and gas prices threaten to crush the economy,"

China's Covid Lockdowns Impact Its Economy

China's deployment of strict movement restrictions to combat the coronavirus might hamper the country's economic growth. As pandemic restrictions expand, economists have lowered growth projections for the world's second largest economy, raising doubts on the government's ability to fulfill its objective of 5.5% growth this year.

BENCHMARK'S TAKE

  • The conflict in Ukraine, the Fed's efforts against the extraordinarily elevated inflation and fresh Covid lockdowns in China are weighting on markets and fuelling fears of a recession
  • The Fed is betting on a "soft landing", believing it can achieve its goal of taming high inflation without increasing unemployment or triggering a recession
  • Meanwhile, concerns about an upcoming recession are being reflected in the US government bond market as the yield curve inverted late March for the first time since 2019

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Maarten van den Heuvel on Unsplash