The world has moved past the period of pandemic lockdowns and hefty stimuli into one of immense economic uncertainty. Inflation in the US nearly 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. Though partisan gridlock over the US debt ceiling was resolved, underlying tensions remain and could constrain responses to a recession. 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 a host of issues, while potential hot spots in the Korean Peninsula and the Middle East also continue to make headlines.
Economist polls have suggested the high likelihood of a recession in the US and eurozone for nearly a year. The US 10-year minus 2-year Treasury yield spread has been inverted since July 2022, generally indicative of a recession within 12 months. The eurozone has technically entered a recession, as revised figures show two quarters of –0.1% quarter-over-quarter growth (year-over-year figures remained positive). Meanwhile, Chinese growth remains slow.
Central banks on both sides of the Atlantic remain concerned with taming inflation. The central banks of the US, UK, and eurozone have raised rates aggressively. It’s unclear if central bankers believe the work of fighting inflation is finished, even though the US Fed held off on rate increases in its June meeting. Though no new major banks have had crises since the sale of First Republic Bank in May, many financial institutions remain vulnerable.
All the ingredients for continued economic fragility and uncertainty are present. Recent ructions in the financial markets make the timing of a downturn more unpredictable, leaving central banks, businesses, and investors to navigate the currents. Until the uncertainty dissipates, it’s critical for companies to prepare for a range of economic scenarios.
The Possibility of a Recession
The US economy has not yet entered a recession, but there is a growing risk of one happening in the near future. The US 10-year minus 2-year Treasury yield spread has been inverted since July 2022, which is generally indicative of a recession within 12 months. The eurozone has technically entered a recession, and Chinese growth remains slow.
Central banks on both sides of the Atlantic remain concerned with taming inflation. They have raised rates aggressively, but it is unclear if they believe the work of fighting inflation is finished.
The recent ructions in the financial markets make the timing of a downturn more unpredictable. This leaves central banks, businesses, and investors to navigate the currents. Until the uncertainty dissipates, it is critical for companies to prepare for a range of economic scenarios.
Whether or not a recession is already here is a matter of debate among economists. Some believe that the US economy is already in a recession, while others believe that it is still technically growing, but at a very slow pace. The National Bureau of Economic Research (NBER), which is the official arbiter of US recessions, has not yet declared that a recession has begun.
However, the economic indicators are flashing red. Inflation is at a 40-year high, and the Federal Reserve is raising interest rates aggressively in an attempt to cool it down. This is likely to slow economic growth even further.
Reference: Bain & Company
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