Recession is not expected - yet
By the standards of downturns stained upon recent memory - the financial crash of 2008 and pandemic-induced collapse of 2020 - America’s next recession is predicted to be far less severe. But because the world economy, asset markets and America’s politics are all fragile, it may yet have nasty and unpredictable consequences.
There is no escaping the squeeze ahead for America’s economy. Surging food and petrol prices are eating into people’s spending. Supply-chain problems could flare up for as long as war rages in Ukraine and China sticks to its zero-covid policy. Companies will be unable to cope with wage growth at all time highs unless they raise prices fast.
Investors expect the Fed to have raised interest rates by more than 2.5 percentage points by the end of 2022. The central bank states that it can hit its 2% inflation target without causing a downturn, but history suggests that by acting to tame inflation it will cause the economy to shrink.
Even a mild American recession would expose glaring fragilities. One is the commodity-price crisis in much of the world, the result of Russia’s invasion of Ukraine. Countries from the Middle East to Asia are facing severe food shortages and soaring fuel bills. The euro zone is dealing with an especially sharp energy shock as it weans itself off Russian oil and gas. Around the world, household incomes are collapsing in real terms.
An American recession would land another blow on vulnerable parts of the global economy by curbing demand for their exports. Tighter monetary policy at the Fed and the resulting strength of the dollar would also compound what has already been the biggest sell-off in emerging-market bonds since 1994. The IMF says that about 60% of poor countries are suffering debt distress, or are at high risk of it.
Most economists are now saying that a recession is unlikely in the immediate future given the strength of the jobs market and excess cash on household balance sheets. Their concern is for next year and beyond as the Federal Reserve continues to raise interest rates.