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Threat of global recession: what is the situation in the USA, Europe and China?

Worldwide the economy is slowing down, monetary policy is tightening, and the risk of a global recession is rising. Nevertheless, the situation in the U.S., the eurozone and China cannot adopt a one size fits all approach, but must be differentiated, according to Dr. Andrea Siviero, Investment Strategist: "Despite the same broad framework, the respective economic data, inflation dynamics as well as the further outlook in those markets are heterogeneous."

U.S.: Progress in fighting inflation

"The Fed seems to be well on its way to bringing inflation back under control and gaining political leeway," says Siviero, assessing the situation in the US. In doing so, he says, the Fed can still count on a robust economy and solid employment levels. "However, restoring price stability will almost inevitably be accompanied by a prolonged period of slower growth and higher unemployment. That makes a recession increasingly likely." Since March, the Fed has raised the federal funds rate in several steps by a total of 3.25 percentage points and intends to keep policy rates high for an extended period to bring down inflation.

The U.S. economy weathered the pandemic well thanks to unprecedented policy support. According to Siviero, "Inflation was driven primarily by strong aggregate demand and showed worrying signs of becoming broader and more structural". He adds that full employment prevailed in the labour market, wages rose at a healthy pace, and personal income and spending remained solid despite weak consumer confidence.

Eurozone: recession hardly avoidable

The situation in Europe is different: record-high inflation, which continues to expand and solidify, is primarily due to the sharp rise in energy prices and the weakening of the euro. "The ECB's stated determination to vigorously bring inflation back to target levels makes a recession in 2023 look increasingly likely. While fiscal policy will be able to mitigate the negative effects of stagflation, overall, a recession in the second half of the year seems almost inevitable," Siviero judges.

The ECB only started tightening its monetary policy in July, when economic growth had already slowed down. Economically, the eurozone has not yet fully recovered from the pandemic shock and is suffering from historically high inflation, energy shortages and droughts. "Economic activity is subdued, and the industrial sector continues to suffer from supply shortages and weak global demand," Andrea Siviero said. "The labour market remains healthy, but wage growth is unable to keep pace with inflation." Accordingly, consumer confidence is at an all-time low, with consumers suffering from a sharp decline in real disposable income and a decline of their purchasing power.

China: Real estate crisis impacts growth

For ETHENEA’s investment strategist Siviero, the view on China is restrained: Despite strong monetary and fiscal policy support to boost growth, domestic consumption is weak and credit growth is low as businesses and households remain pessimistic about the economic outlook. "Accommodative policy will continue to boost growth, but excessive debt, slowing demand, and tensions between economic goals and health concerns will likely continue to hamper growth for the rest of the year." Geopolitical tensions with the U.S. over Taiwan are an additional concern for China as well as the global economy.

The National People's Congress had announced an ambitious official GDP growth target of 5.5% for 2022, but officials have already tacitly acknowledged that this target will not be met. According to Siviero: "The Chinese economy has been slowing for some time and is being held back by regulatory tightening, repeated covid outbreaks and severe lockdowns with closures of large economic zones. In addition, the real estate sector is in deep crisis, showing worrying signs of overinvestment and over-indebtedness."