Signals from economic data, particularly in Europe and the USA, point to an increased risk of recession. Investors will carefully monitor some critical data over the coming period to assess this risk.
Rising interest rates, inflation and the ongoing energy crisis reinforce belief that the global economy is headed for recession.
Signs of a recession continue to mount, a risk US Treasury Secretary Janet Yellen and European Central Bank Governor Christine Lagarde have accepted, although not a fundamental scenario.
There was debate as to whether the country was entering a recession after US gross domestic product (GDP) contracted for two consecutive quarters, and officials said it was an exceptional situation and the situation did not mean a recession. However, data on production in both Europe and the US show that the signs of an economic recession are increasing.
INCREASED RISK IN EUROPE
As recession risks continue to mount in Europe, a drought has exacerbated Germany’s natural gas supply problem and lowered water levels in rivers.
Accordingly, there are concerns that the inability of some ships to sail according to the water levels in the country, where rivers are an important part of domestic and foreign trade, could affect the country’s supply chain.
While annual inflation in the euro zone reached a record level of 8.9 percent in July due to higher energy prices, construction output in June fell by 1.3 percent month-on-month.
While the euro zone grew 0.6 percent quarterly and 3.9 percent annually in the second quarter of the year, it fell short of expectations, while the UK consumer price index (CPI) beated expectations with a 10.1 percent annual increase fastest increase in the last 40 years.
The purchasing manager indices to be announced this week will also give one of the key signals of a recession. Any data showing private sector output contracting would send a serious signal of recession in the 19-nation euro zone.
SIGNALS FROM USA NEGATIVE
While the dilemma of inflation and recession persists in the USA, price formation on the markets is also becoming more difficult.
While US bond markets followed a sales-weighted path this week, the inverted yield curve continues to fuel recession fears for some assets.
According to macroeconomic data announced in the country, sales of second-hand homes in July recorded the sixth month of their decline, falling 5.9 percent monthly to the lowest level since May 2020.
The number of people applying for unemployment benefits for the first time fell by 2,000 to 250,000 in the week ended August 13 compared to the previous week. Unemployment benefits, which fell contrary to market expectations, indicated solid demand for labour.
While U.S. retail sales were unexpectedly flat in July, second-quarter profit at Target, one of the country’s largest department stores, fell nearly 90 percent as consumers avoided spending voluntarily due to high inflation.
Housing starts in the country fell 9.6 percent to 1 million,446 thousand in July, the lowest level since February 2021. Building permits fell 1.3 percent on a monthly basis to 1 million,674 thousand in July.
WHAT DO EXPERTS SAY?
The International Monetary Fund (IMF) lowered its global growth forecasts last month, warning that the global economy could come close to recession if risks from high inflation and the Ukraine war are not brought under control.
In the report it published, the institution lowered its forecast for global real gross domestic product (GDP) growth to 3.2 percent from 3.6 percent. The IMF’s growth forecast for 2023 was reduced from 3.6 percent to 2.9 percent.
Mark Zandi, chief economist at Moody’s Analytics, stated that the US economic contraction does not portend a recession: “This is not a recession. “It’s not even in the same universe as recession,” he said.
“There are early signs that GDP will turn positive this quarter,” Zandi said, noting that the only thing pointing to a prolonged recession is the negative GDP decline for two consecutive quarters.
WHAT IS A RECESSION?
A recession is defined as a moderate decline in real economic activity culminating in a negative stable business cycle, with a decline in real gross domestic product due to a decline in a country’s economic activity, stagnation in economic activity. When the contraction of the economy is not moderate but severe, it is called a depression.
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