Depressive moods. The US is on the verge of recession, the whole world is next

Everyone is speculating on the sad prospects for the American economy: from specialized media to opinion leaders like Elon Musk and Donald Trump. The chances of sliding into a recession are estimated at 50%, and some analysts even warn of an impending economic hurricane.

The US authorities really found themselves between two fires: on the one hand, they need to somehow stop the insane rise in prices, on the other, try to avoid a slowdown in the economy. At the end of May, inflation updated the record of 1981, having fixed at the level of 8.6%. The sharp rise in prices led to an equally sharp reaction from the regulator - the Fed raised the rate immediately by a record 75 basis points since 1994, to 1.5-1.75% per annum.

However, even these efforts of the financial authorities are not very convincing to the market - the indices continue to beat anti-records , fueling the debate about the passage of the "bottom". The two major US indices S&P500 and Dow Jones have fallen by almost 20% since the beginning of the year, while the high-tech NASDAQ has fallen by 30%.

Lots of money, lots of problems

The current crisis is the result of many years of accumulation of various macroeconomic and structural imbalances in the US economy. Probably, the abscess would not have opened soon, but the “black swans” in the form of the coronavirus pandemic and the war in Ukraine have exacerbated long-standing problems.

The coronavirus pandemic has been the worst economic shock to the world since the Great Depression of the 1930s. To contain the disease, the United States and many other countries had to take restrictive measures unprecedented in their severity and actually freeze the economy. In the second quarter of 2020, US GDP contracted by a record 32.9%, and at the end of the year fell by 3.5% - the worst figure since World War II.

Large-scale problems demanded equally large-scale responses. The US Federal Reserve, like the central banks of many other countries, has taken the path of low interest rates and the so-called quantitative easing (Quantitative Easing, QE) - injecting money into the economy through the purchase of government and corporate bonds. In total, since January 1, 2020, the Fed's balance sheet has grown by $4.7 trillion, to a record $8.9 trillion. At the same time, the regulator kept the interest rate at a near-zero level.

The essence of quantitative easing is that increased demand for bonds leads to a decrease in their yield. This, in turn, leads to cheaper loans and revitalizes lending, and consequently, entire sectors of the economy. In addition, buying bonds encourages investors to invest in other, more profitable assets, such as stocks. As a result, the capitalization of enterprises increases, the assets of investors increase, which stimulates economic activity.

However, cheap money came not only from the Fed - to combat the pandemic, the American authorities adopted several anti-crisis packages totaling almost $4 trillion. The largest was the Response&Relief Act signed by Trump at the end of 2020. It contained measures to support lending ($339 billion), direct payments to citizens ($166 billion), child and unemployment benefits ($148 billion), health care spending ($90 billion), etc.

A year later, Joe Biden proposed a new $1.9 trillion fiscal bailout package. It also provided for direct payments to the population, spending on the healthcare system, and assistance to affected enterprises. In total, the total fiscal stimulus introduced in the United States amounted to about $ 6 trillion, or about 30% of GDP - four times more than was spent on fighting the previous crisis.

The United States spent 30% of GDP on stimulating the economy during a pandemic

With incentives, the authorities tried to prevent a dramatic economic downturn and a protracted structural adjustment, as was the case in 2008-2010. Then the country lost 8.7 million jobs, and the recovery of the labor market took six years. But today the practically uncontrolled issue of money has led to new problems.

Sudden inflation and record gas prices

The main consequence of the current US economic policy has been inflation, the highest since the 1980s. At the end of 2021, it was 7% with a target level of 2%, and in May 2022 it accelerated to 8.6%. All two years of the pandemic, economists sounded the alarm . But Fed chief Jerome Powell insisted that inflation was unlikely to pose a threat to the US economy in the foreseeable future. He, like Treasury Secretary Janet Yellen, was convinced that this was a temporary phenomenon.

For them, the main task was to achieve the maximum level of employment of the population, and the tightening of monetary policy threatened to slow down hiring and other indicators of business activity. Among other things, the Fed has already had a negative experience in connection with the curtailment of stimulus - in 2013, a careless decision by the regulator led to a panic in the stock market.

Jerome Powell and Janet Yellen

But already in the summer of 2021, the Fed began to think about the need to somehow balance between the risk of overheating the economy and the risk of disrupting its recovery. True, the regulator switched from words to deeds only after almost a year - in May, the Fed raised the rate by 50 basis points, and in June - by as much as 75 points at once - an absolute record for the last 28 years. In addition, from June 1, the regulator began to reduce its balance sheet, i.e. sell off $30 billion and $17.5 billion in treasury and mortgage bonds per month, respectively. Sales will double in September.

In fact, the Fed simply missed the moment when it was necessary to start tightening monetary policy. However, it is worth considering the context here - for a long time, on the contrary, the United States unsuccessfully tried to disperse inflation in order to stimulate the market. And many economists attributed the surge in inflation in 2021 mainly to the reopening of the economy after the lockdowns. In addition, for some time the main drivers of inflation in the US slowed down somewhat without any intervention from the regulator. Nevertheless, in order to stop the growth of inflationary expectations, the Fed kept heating up the upcoming tightening by announcing plans to increase the rate and reduce the balance sheet at the beginning of 2022.

The Fed missed the moment when it was necessary to raise the rate

And everything seemed to be going well, but the autumn-winter period brought another surprise. First, a new strain of the omicron coronavirus emerged, which proved to be much more contagious than all its predecessors (though less deadly). Despite no new lockdowns, the spread of this strain, according to the International Monetary Fund (IMF), has undermined barely-recovered supply chains and increased labor shortages. A separate blow to the global economy was the closure of the multi-million dollar Shanghai, the center of international trade and business within China, as well as the world's largest container port.

Secondly, the gas conflicts that began between Russia and the European Union have sharply raised the cost of energy resources around the world. Back in September, the European Parliament accused Gazprom of a record rise in gas prices. The EU insisted that the Russian company was blackmailing with high gas prices in order to get permission to launch Nord Stream 2. For comparison, if at the end of 2020 gas prices fluctuated around $200 per cubic meter, then by the end of 2021 they reached $2,200. Russia, in response, blamed the Europeans themselves and talked about a combination of factors that led to this situation.

The latest "black swan" was the war on the territory of Ukraine and the subsequent unprecedented economic sanctions against Russia. The fighting disrupted many new supply chains and pushed up energy prices again, with a thousand cubic meters at its peak of over $3,800. In early June, the head of the US Treasury admitted that she had made a mistake in forecasting the path inflation would take. These unforeseen shocks had a negative effect on the US economy, which she did not expect.

Among other things, the war raised the question of a food crisis and the threat of famine. The conflict led to the cessation of supplies from Ukrainian ports, which previously exported huge amounts of vegetable oil, as well as corn and wheat. This reduced the global supply and caused the prices of alternatives to skyrocket. According to the UN, world food prices were almost 30% higher than at the same time last year.

Zugzwang of the US Federal Reserve

The Fed found itself in an extremely difficult position. On the one hand, it is necessary to curb price increases by tightening monetary policy, and on the other hand, to prevent a recession in the economy, jeopardizing the entire post-COVID growth. The labor market, despite the historically huge demand for labor in the US, has just recovered to pre-dovid levels. And the first signs of a downturn after raising the rate and curtailing the asset buyback program are already there : for example, the Commerce Department recorded a sharp decrease in home construction in the country in May.

Raising the base interest rate makes money more expensive - people and companies are reluctant to borrow at high interest rates, which reduces consumption, makes it harder for companies to invest, and leads to higher unemployment. Among other things, the costs of servicing the huge US public debt are rising. Since the beginning of the pandemic, it has grown by $7 trillion, to a record $30.5 trillion, or 143.5% of US GDP. It is difficult to deal with such exorbitant debt, but President Joe Biden planned to reduce at least the budget deficit, which is usually patched with borrowed money, by at least $ 1.5 trillion per year.

Much depends on what the Fed ultimately chooses: fighting inflation or maintaining financial stability. Until now, the choice was rather not in favor of the first option, despite the ostentatious determination of the monetary authorities. Ethan Harris, head of global economics research at Bank of America, believes that the Fed will probably be ready to compromise and agree to inflation stabilization at 3% or even slightly higher. In his opinion, this will allow the US to avoid a serious economic downturn. “Remember that the great inflation fighter [Fed chairman 1979-1987] Paul Volcker stepped back, bringing inflation down to 4%,” Harris recalled.

However, the fundamental difference between the times of Volcker and the current ones is that record inflation is a global trend. The world economy is bursting at the seams due to politics and international tensions. According to experts from the Bank for International Settlements (BIS), there is a risk that rapid and uncontrolled price increases could become the new normal.

Rapid and uncontrolled price increases could become the new normal for the world

For example, the situation in the same European Union is even worse than in the United States, due to dependence on Russian energy imports. Thus, in June, inflation in Europe broke a historical record, settling at 8.6%. Fuel prices have already skyrocketed by almost 42% year-on-year. And this is not the limit - the situation may worsen due to the EU embargo on Russian oil supplies. The World Bank (WB) and the International Monetary Fund (IMF) have already significantly worsened their forecasts for eurozone GDP this year - growth is expected by 2.5% and 2.8%, respectively, against 4.2% and 3.9% earlier.

The scary numbers are forcing the European Central Bank (ECB) to raise rates, as the Fed is already doing. However, the risks are high - the decision will hit the budgets of the already problematic and most indebted members of the eurozone: Greece, Italy, Spain, Portugal. If the rate is not raised, another problem will arise - the unprotected segments of the population will become poorer, they will need state support, and state support means printing money. But a new issue in the current environment will provoke an even greater increase in inflation with the risks of transition to hyperinflation and the collapse of the monetary system. It seems that against the backdrop of the situation in Europe, the United States still has room for maneuver.

Against the backdrop of the situation in Europe, the United States still has room for maneuver

Recession, stagflation and everything

Although talk of an approaching recession in the US economy is getting louder every day. Analysts at Goldman Sachs recently recalled that most (about 80%) of monetary tightening cycles since World War II have been followed by a two-year recession at the current growth rate. In general, according to the consensus forecast of American economists, a recession in the country may occur in the next 12 months with a probability of 44%. For comparison, in December 2007, economists estimated the probability of a recession at 38%, and in February 2020 - at 26%.

The head of the IMF, Kristalina Georgieva, also cautiously hinted at the possibility of a recession: “We expected the US economy to slow down. We recognize that the path to avoiding a recession in the US is narrowing." However, there are more daring opinions - that the recession does not threaten the United States in the future, since it has already begun. For example, former President Donald Trump thinks so. “This is not something that can happen in two years ... We are already in a recession,” he said and expressed what most Americans actually feel. According to the index of economic optimism from IBD / TIPP, 53% of citizens believe that their economy has already entered a recession, another 25% of respondents found it difficult to answer, and only 20% of respondents expressed the opinion that there is no recession in the country.

Kristalina Georgieva

It is impossible to say for sure yet, since there is no data that would unequivocally confirm that the US economy is already in a recession cycle. A recession is said to be when a country's GDP has been declining for two consecutive quarters. In the first quarter of 2022, US GDP did unexpectedly contract by 1.4%, contrary to forecasts. However, data for the second quarter is not yet available. If the fears of analysts and citizens are nevertheless confirmed, then the US economy has every chance of facing the worst scenario - stagflation - when the fall in key macro indicators is accompanied by a rapid rise in prices.

Prospects for Russia

If a recession does start, it will affect not only the United States, but will sweep to one degree or another around the world. Crisis phenomena in the world's first economy are expected to lead to the same events in emerging and developed markets. Especially considering that the pandemic and geopolitical challenges have already battered many world economies. Thus, China's economic growth prospects have been undermined by strict restrictive measures to combat the omicron strain, European households are experiencing a cost-of-living crisis, and poor, developing countries are threatened by a food crisis.

For Russia, the recession in the United States will most likely not have such a dramatic effect, but only because the Russian economy itself has already faced an unprecedented number of shocks and real isolation. Therefore, a recession is inevitable for her. The World Bank expects Russia's GDP to decline by 8.9% in 2022. The Russian authorities are also preparing for serious consequences. According to the official forecast of the Ministry of Economic Development, GDP will decrease by 7.8% this year. The latest (June) forecast of the Central Bank is slightly more optimistic - the regulator expects a fall of 7.5%. These figures are comparable to the crisis year of 2009, when Russian GDP fell by 7.9%.

However, Oleg Vyugin, chairman of the Supervisory Board of the Moscow Exchange, believes that comparisons of the current situation with the crises of the past are hardly appropriate. “This is a new type of crisis. We cannot compare it with either 2008 or 2014. Those crises were corrected by market forces. What is happening now is non-market in nature. This crisis is generated by the mass exodus of investors and companies, so it will be harder,” the expert stated. The head of the Accounts Chamber, Alexei Kudrin, is also confident that the current crisis will be much more difficult than in 2009.

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