Across the world, markets are flashing warning signs that the global economy is teetering on the edge.
The question of stagnation is no longer if, but when.
Over the past week, the pulse of those flashing red lights has accelerated as markets grapple with the reality — once speculative, now certain — that the Fed You will press With the most aggressive monetary policy tightening campaign in decades to wring inflation out of the US economy. Even if it means a recession. Even if it is at the expense of consumers and distant companies outside the borders of the United States.
There is now a file 98% chance The global recession, according to research firm Ned Davis, brings some real-world historical credibility to the table. The company’s recession probability reading was only twice as high as before – in 2008 and 2020.
When economists warn of an economic downturn, they usually base their assessment on a variety of indicators.
Let’s consider five main directions:
The US dollar plays a huge role in the global economy and international finance. It is now stronger than it was two decades ago.
The simplest explanation goes back to the Federal Reserve.
When the US central bank raises interest rates, as it has been doing since March, it makes the dollar more attractive to investors around the world.
In any economic climate, the dollar is seen as a safe place to park your money. In a turbulent climate — a global pandemic, for example, or a war in Eastern Europe — investors have a greater incentive to buy dollars, usually in the form of US government bonds.
While a strong dollar is a good advantage for Americans who travel abroad, it also gives them headaches Just about everyone else.
The British pound, the euro, the Chinese yuan, and the Japanese yen, among many others, fell in value. This makes importing basic items such as food and fuel more expensive for these countries.
In response, central banks already battling pandemic inflation end up raising rates higher and faster to prop up the value of their currencies.
A stronger dollar is also creating destabilizing effects on Wall Street, where many S&P 500 companies do business around the world. According to one estimate From Morgan StanleyEach 1% rise in the dollar index has a negative 0.5% impact on S&P 500 earnings.
Shopping is the first driver of the world’s largest economy. And shoppers in America are tired.
After more than a year of skyrocketing prices on just about everything, with wages not keeping up, consumers are backing off.
“Handling inflation means that consumers are indulging in their savings,” Gregory Daco, chief economist at EY Parthenon, said in a note on Friday. Daco said the personal savings rate in August remained unchanged at just 3.5% — near its lowest rate since 2008, and well below the pre-Covid level of around 9%.
Again, the reason for the decline has a lot to do with the Fed.
her interest rates It has risen at a historic pace, pushing mortgage rates to their highest level in more than a decade and making it difficult for businesses to grow. Ultimately, an interest rate increase by the Fed is supposed to bring costs down broadly. But in the meantime, consumers are getting a boost from higher borrowing rates and higher prices, especially when it comes to necessities like food and housing.
Americans opened their wallets during the 2020 lockdowns, which buoyed the economy out of a short but severe pandemic recession. Since then, government aid has evaporated and inflation has taken root, sending prices rising at their fastest rate in 40 years and depleting consumers’ purchasing power.
Business has been thriving across industries for much of the pandemic era, even with historically high inflation consuming profits. Thanks (again) to the persistence of American shoppers, companies have largely been able to pass on their higher costs to consumers to smooth out profit margins.
But the boom may not last.
In mid-September, a company whose fortunes serve as a kind of entrepreneurial economy shocked investors.
FedEx, which operates in more than 200 countries, Revise her forecast unexpectedlywarning that demand is declining, and profits are likely to fall by more than 40%.
In an interview, the company’s CEO was asked if he thought the slowdown was a sign of a looming global recession.
He replied, “I think so.” “These numbers, they don’t bode well.”
FedEx is not alone. On Tuesday, Apple’s stock fell after Bloomberg reported that the company was plans to cancel To increase the production of iPhone 14 after the demand came less than expectations.
And just before the holiday season, when employers usually ramp up hiring, the mood is now more cautious.
“We haven’t seen the usual spike in September in companies applying for temporary assistance,” said Julia Pollack, chief economist at ZipRecruiter. “Companies are stepping back and waiting to see what the conditions are.”
Wall Street has been hit hard, and stocks are now on track for their worst year since 2008 — in case anyone needs another scary historical comparison.
But last year it was a completely different story. Stock markets boomed in 2021, with the S&P 500 up 27%, thanks to an influx of cash injected by the Federal Reserve, which unleashed a double-dip monetary easing in the spring of 2020 to prevent financial markets from collapsing.
The party went on till early 2022. But with inflation set to kick in, the Fed started ditching the proverbial bowl, raising interest rates and unwinding the bond-buying mechanism that underpinned the market.
The hangover was brutal. S&P 500, Wall Street’s widest scale – And the index – responsible for the bulk of Americans’ 401(k) – is down nearly 24% for the year. And she is not alone. All three major US indices are In bear markets At least 20% down from its recent high.
In an unfortunate development, bond markets, usually a safe haven for investors when stocks and other assets go down, It is also in a state of decline.
Again, blame the Fed.
Inflation, along with a sharp rise in interest rates by the central bank, has lowered bond prices, which has resulted in higher bond yields (aka the return an investor gets for his loan to the government).
On Wednesday, the yield on US 10-year Treasury bonds briefly exceeded 4%, hitting a 14-year high. This rally was followed by a sharp decline in response to the Bank of England’s intervention in its own spiraling bond market – which amounts to tectonic moves in a corner of the financial world designed to be flat, if not downright boring.
European bond yields are also rising as central banks follow the Fed’s lead in raising interest rates to support their own currencies.
Bottom line: There are a few safe places for investors to put their money right now, and that’s unlikely to change until Global inflation is under control and central banks are loosening their grip.
Nowhere is the collision of economic, financial and political disasters more dire than in the UK.
Like the rest of the world, the UK has suffered from price hikes largely attributable to the massive shock of Covid-19, which was followed by the trade disruptions resulting from the Russian invasion of Ukraine. As the West cut off imports of Russian natural gas, energy prices rose and supplies dwindled.
Those events were bad enough on their own.
But then, just over a week ago, the newly formed government of Prime Minister Liz Truss announced Comprehensive tax cut plan Economists are on both sides of the political spectrum She was denounced as unorthodox at best, satanic at worst.
In short, the Truss administration said it would cut taxes for all Britons to encourage spending and investment, and in theory ease the recession. But the tax cuts are not funded, which means the government should do it Take on debt to finance it.
This decision sparked panic in the financial markets and put Downing Street in a confrontation with its independent central bank, the Bank of England. Investors around the world sold UK bonds in droves, sending the pound sterling to its lowest level against the dollar in nearly 230 years. As in 1792, when Congress introduced the legal tender for the US dollar.
Bank of England systems emergency intervention To buy British bonds on Wednesday and restore order in the financial markets. I have stopped the bleeding for now. but the ripple effect Trosnonomics disorder is spreading far beyond the desks of bond dealers.
Britons, already grappling with a cost-of-living crisis, with inflation at 10% – the highest of any G7 economy – are now panicking. Higher borrowing costs It could force millions of monthly mortgage payments to millions of homes to rise by hundreds or even thousands of pounds.
Although the consensus is that a global recession may occur sometime in 2023, it is impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the Great Recession of 2007-2009, but every recession is, of course.
Some economies, notably the US, with a strong labor market and resilient consumers, will be able to take the hit better than others.
“We are in an unknown state in the coming months,” economists at the World Economic Forum wrote in a report this week.
“The immediate prospects for the global economy and for much of the world’s population are bleak,” they continued, adding that the challenges “will test the resilience of economies and societies and impose a heavy burden on human casualties.”
But they said there are some silver linings. Crises are forcing transformations that can ultimately improve living standards and strengthen economies.
“Business must change. This has been the story since the pandemic began,” Reema Bhatia saidEconomic advisor to Gulf International Bank. “Companies can no longer continue on the path they were on. This is the opportunity and this is the silver lining.”
CNN Business’s Julia Horowitz, Anna Cuban, Mark Thompson, Matt Egan, and Chris Isidore contributed to the report.
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