Several key measures indicate a heightened recession risk
Inflation has largely subsided in the US, but Europe’s remains historically high
The world has moved past the period of pandemic lockdowns and hefty stimuli into one of immense economic uncertainty. Inflation in the US reached the heights of the early 1980s, peaking at 9.1% in June 2022. Central bank moves are roiling bond and interest rate markets, putting significant stress on some financial institutions. Partisan gridlock in Washington has also created the risk of a highly damaging US debt default. Even if resolved without a default, continued conflict around America's debt ceiling and budget will add to uncertainty. Meanwhile, Russia’s invasion of Ukraine and the ongoing war marks the deadliest military conflict in Europe since 1945. And other geopolitical and trade tensions are mounting. The US and China remain at odds over spy balloons, TikTok, semiconductor restrictions, and Taiwan, while potential hot spots in the Korean Peninsula and the Middle East continue to make headlines.
Economist polls have suggested the high likelihood of a recession in the US and eurozone for nearly a year, and the US 10-year minus 2-year Treasury yield spread has been inverted since July, generally indicative of a recession within 12 months. The central banks of the US, UK, and eurozone have raised rates aggressively, but it's unclear if central bankers believe the work of fighting inflation is finished. Several recent incidents, including the failures of Signature Bank and Silicon Valley Bank, and the rescues of First Republic Bank by JPMorgan and Credit Suisse by UBS, expose the risk of financial contagion amid rapid interest rate increases. Many financial institutions remain vulnerable as high interest rates erode the market value of their assets, making further failures a possibility.
All the ingredients for continued economic fragility and uncertainty are present, and recent ructions in the financial markets make the timing of a downturn more unpredictable, leaving central banks, businesses, and investors to navigate the currents. Central banks on both sides of the Atlantic remain concerned with taming inflation, though markets expect rates are nearing—or, in the case of the US, past—their peaks, and the US may even be poised to pause policy rate increases. But until the uncertainty dissipates, it’s critical for companies to prepare for a range of economic scenarios.
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