Recession Risk: How Will Major Economies Respond?
The possibility of a recession looms in the United States and other major industrial nations, as negative growth is expected in two successive quarters this year.
However, the limited scope for remedies, with global monetary policy focused on fighting inflation and overstretched government budgets due to the Covid-19 pandemic, creates a challenge.
As a significant player in the manufacturing industry, China aspires to robust global trade expansion to drive an upsurge in export revenues. The possibility of a downturn may impede its aim of attaining a GDP goal of approximately 5% in the current year.
Impacts of a Potential Recession
To keep growth plans on track, easier credit, lower interest rates, and more budget stimulus are needed. The same is true for advanced economies to avoid a deeper downturn this year.
Still, the current state of the economy is showing signs of decline, with business activity indicators on the decline. In March, the purchasing managers’ index for global manufacturing decreased to 49.6, below the critical 50 mark that determines whether there is expansion or contraction in factory-sector business activity. Additionally, inflation has peaked, and governments are pressured to control deficit spending. Interest rates are also notably high.
Policy Responses to Economic Downturn
Financial market indicators also highlight the specter of recession, such as the US Treasury bond curve. An inverted Treasury yield curve indicates that the US economy is already recession-bound.
In the event of a recession, the main concern would not be excessive inflation but rather the re-emergence of deflation. Despite indications of a potential economic downturn and decreasing inflation, the Federal Reserve appears to be engaging in a risky game of brinkmanship by signaling another rate increase in May.
International Implications and Strategies for Growth
The major central banks need to alter their course soon; otherwise, the consequences for global economic confidence could be grim.
Given the possibility of a recession in the US, there is now added pressure on major exporting countries like Germany and China to boost their own economies domestically in order to offset the potential impact. In order to promote global growth, policymakers worldwide should prioritize a return to more lenient economic policies.
Leading Economig Index
The Conference Board’s Leading Economic Index (LEI) has fallen sharply by 1.2% in March, surpassing the anticipated 0.7% drop, indicating an impending recession. This drop marks the index’s most substantial monthly decline since the pandemic’s economic chaos in April 2020.
The LEI has indicated an oncoming recession for many months, and the probability only deepened with the latest data. Economists at Wells Fargo Securities suggest it’s time to prepare for the impact, as the economy could fall into a recession by mid-2023. Other economists surveyed by the Wall Street Journal this week predicted a 61% chance of a recession beginning in the year’s third quarter.
Despite recent data showing that the job market is holding up better than expected, the LEI reading for March was dismal, with only two indicators, manufacturing orders and the stock market, barely making it into positive territory out of the ten indicators comprising the index.