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CNN Business
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Around the world, markets are showing warning signs that the global economy is headed for a cliff edge.
The question of recession is not now, but when.
Over the past week, the pulse of those flashing the red lights intensified as the market grappled with the reality – once speculative, now certain – that the Federal Reserve was trying to shore up inflation from the US economy with its most aggressive monetary tightening campaign in decades. Will put pressure on Even if it means triggering a recession. And even if it comes at the cost of consumers and businesses beyond US borders.
There is now a 98% chance of a global recession, according to research firm Ned Davis, which brings some pretty historical credibility to the table. Only twice has it been higher than before – in 2008 and 2020 – reading the firm’s likelihood of a recession.
When economists warn of a recession, they usually base their assessment on a variety of indicators.
Let’s unpack five major trends:
The US dollar plays a large role in the global economy and international finance. And right now, it’s stronger than it was in two decades ago.
The simplest explanation comes back to the Fed.
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 store your money. In a turbulent environment — a global pandemic, say, or a war in Eastern Europe — investors have even more incentive to buy dollars, usually in the form of US government bonds.
While a strong dollar is a nice advantage for Americans traveling abroad, it creates a headache for almost everyone.
The UK pound, euro, China’s yuan and Japan’s yen have fallen in value, among many others. This makes it more expensive for those countries to import essential goods such as food and fuel.
In response, central banks that are already fighting pandemic-induced inflation are raising rates higher and faster to prop up the value of their currencies.
The dollar’s strength also creates volatile implications for Wall Street, as many of the S&P 500 companies are traded around the world. According to an estimate by Morgan Stanley, every 1% increase in the dollar index has a negative 0.5% impact on S&P 500 earnings.
The number 1 driver of the world’s largest economy is shopping. And America’s buyers are tired.
After rising prices on everything for more than a year, with no increase in wages, consumers have retreated.
“The hardship caused by inflation means consumers are dipping into their savings,” Gregory Dako, chief economist at EY Parthenon, said in a note Friday. The personal savings rate remained unchanged at just 3.5% in August, Dako said – close to its lowest rate since 2008, and well below its pre-Covid level of about 9%.
Once again, the reason behind the pullback has a lot to do with the Fed.
interest rates are grew at a historic pace, pushing mortgage rates to their highest levels in more than a decade and stymied the growth of businesses. Ultimately, the Fed’s rate hikes should largely offset costs. But in the meantime, consumers are getting a one-two punch of higher lending rates and higher prices, especially when it comes to necessities like food and housing.
Americans open their wallets during the 2020 lockdown, which pulled the economy out of its brief-but-severe pandemic recession. Since then, government aid has been eroded and inflation has taken root, pushing prices to their fastest rate in 40 years and eroding consumers’ spending power.
Business has been booming across industries for the bulk of the pandemic era, with historically high inflation eating into profits. This is thanks (once again) to the tenacity of American shoppers, as businesses were able to pass their high costs on shrinking profit margins to consumers at large.
But the earning bonus cannot last.
In mid-September, a company whose fortunes acted as a sort of economic troubleshooter shocked investors.
FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand is softening, and earnings are likely to drop by more than 40%.
In an interview, its CEO was asked whether he believed the recession was a sign of an impending global recession.
“I think so,” he replied. “These numbers, they don’t portray very well.”
FedEx is not alone. Apple stock fell on Tuesday after Bloomberg reported the company was scrapping plans to ramp up production of the iPhone 14, as demand was lower than expected.
And just ahead of the holiday season, when employers typically accelerate hiring, the mood is now more cautious.
“We haven’t seen the typical September uptick in companies posting for temporary help,” said Julia Pollack, ZipRecruiter’s chief economist. “Companies are hanging back and waiting to see what the conditions are.”
Wall Street has been hit with whiplash, and stocks are now on track for their worst year since 2008 — in case anyone needs yet another scary historical comparison.
But last year was a very different story. Equity markets flourished in 2021, with the S&P 500 up 27% thanks to a squirt of cash pumped in by the Federal Reserve, which launched a double-barrel monetary policy in the spring of 2020 to keep financial markets from collapsing. -Easy policy introduced.
the party went on early 2022. But as inflation kicked in, the Fed began to do away with the proverbial punch bowl, raising interest rates and opening up its bond-buying mechanism that had propelled the market.
The hangover has been brutal. The S&P 500 is Wall Street’s biggest measure And the index — responsible for the bulk of Americans’ 401(k)s — is down nearly 24% for the year. And it’s not alone. All three major US indices are in bear markets – down at least 20% from their most recent highs.
In an unfortunate twist, the bond markets, typically a safe haven for investors, are also in a tailspin when stocks and other assets decline.
Once again, blame the Fed.
Inflation, coupled with a steep increase in interest rates by the central bank, has pushed bond prices down, increasing bond yields (aka the return an investor receives for their loans to the government).
On Wednesday, the yield on the 10-year US Treasury rose more than 4%, hitting its highest level in 14 years. That boom was followed by a sharp decline in response to the Bank of England’s intervention in its own spiraling bond market – what amounted to tectonic moves into a corner of the financial world that is designed to be stable, if not downright boring.
European bond yields are also rising as central banks follow the Fed’s lead in raising rates to prop up their currencies.
Bottom line: There are few safe places for investors to put their money right now, and that’s not likely to change until Global inflation comes under control and central banks loosen their grip.
Nowhere does the collision of economic, financial and political disasters appear more painfully than in the United Kingdom.
Like the rest of the world, the UK has struggled with rising prices, which have largely been attributed to the massive COVID-19 shock, followed by trade disruptions caused by Russia’s invasion of Ukraine. As the West cuts imports of Russian natural gas, energy prices have soared and supplies have dwindled.
Those events were bad enough in themselves.
But then, a week ago, the freshly installed government of Prime Minister Liz Truss announced a sweeping tax-cutting plan, followed by economists from both ends of the political spectrum. As unorthodox at best, devilish at worst.
In short, the Truss administration said it would cut taxes for all Britons to encourage spending and investment and, in theory, soften the blow of the recession. But tax cuts are not funded, which means the government must Take out a loan to finance them.
That decision caused an uproar in financial markets and put Downing Street at a standstill with its independent central bank, the Bank of England. Investors around the world sold large numbers of UK bonds, plunging the pound against the dollar to its lowest level in nearly 230 years. As such, from 1792, when Congress made the US dollar legal tender.
The BOE on Wednesday staged an emergency intervention to buy UK bonds and restore order in the financial markets. It stopped the bleeding, for now. But the ripple effect of the Tresonomics turmoil is spreading far beyond the offices of bond traders.
Britons, already in crisis of a living, with inflation at 10% – the highest in any G7 economy – are now terrified of the high borrowing costs that could push the monthly mortgage payments of millions of homeowners to hundreds or above. may force you to leave. Even thousands of pounds.
While the general consensus is that a global recession is likely 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 Depression of 2007-09, but every recession is, of course, painful.
Some economies, particularly the United States, with their strong labor markets and resilient consumers, will be able to withstand the blow better than others.
“We are in unknown waters in the coming months,” economists at the World Economic Forum wrote in a report this week.
“The immediate outlook for the global economy and for much of the world’s population is dark,” he continued, adding that the challenges “will test the resilience of economies and societies and punish the exact human toll.”
But there are some silver linings, he said. Crisis force changes that can ultimately improve living standards and make economies stronger.
“Businesses have to change. This has been the story since the pandemic began,” said Reema Bhatia, economic advisor at Gulf International Bank. “Businesses can no longer follow the path they were on. This is the opportunity and this is the ray of hope.”
– CNN Business’ Julia Horowitz, Anna Kuban, Mark Thompson, Matt Egan and Chris Isidore contributed reporting.