new york
CNN Business
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Markets around the world are flashing warning signs that the global economy is teetering on the brink.
The question of recession is not when.
Last week, the pace of those flashing red lights accelerated as markets grappled with the reality — once speculative, now certain — that the Federal Reserve will continue its most aggressive monetary tightening campaign in decades to fight inflation in the U.S. economy. Even if that meant triggering a recession. And even if it comes at the expense of consumers and businesses beyond America’s borders.
According to the research firm Ned Davis, there is now a 98% chance of a global recession, which brings some serious historical credibility to the table. The company’s recession reading has only happened twice before – in 2008 and 2020.
When economists warn of a recession, they focus their assessments on a variety of indicators.
Let’s break down five key trends:
The US dollar plays an important role in the global economy and global finance. And now it is stronger than it has been in two decades.
The simplest explanation goes back to the federation.
When the US central bank raises interest rates, as it has been doing since March, it makes the dollar more attractive to investors around the world.
In any economic situation, the dollar is seen as a safe place to park your money. In a climate of turmoil — a global pandemic or war in Eastern Europe — investors have more incentive to buy dollars, usually in U.S. government bonds.
While a strong dollar is a boon for Americans traveling abroad, it creates headaches for everyone else.
The value of the British pound, the euro, the Chinese yuan and the Japanese yen, among others, fell. That makes it more expensive for those countries to import essentials like food and fuel.
In response, central banks battling inflation caused by the pandemic are pushing their currencies higher and faster.
Because many of the S&P 500 companies do business around the world, the strength of the dollar can have a destabilizing effect on Wall Street. According to an estimate from Morgan Stanley, every 1% increase in the dollar index has a negative 0.5% impact on S&P 500 returns.
The No. 1 driver of the world’s largest economy is marketing. And American consumers are tired.
After more than a year of price hikes that drove up prices on everything, not expecting wages, consumers retreated.
“The problem with inflation is that consumers are dipping into their savings,” said Gregory Dako, chief economist at EY Parthenon. The private savings rate was unchanged at just 3.5 percent in August, Dako said — the lowest in 2018. That was the lowest rate since 2008 and 9 percent below pre-Covid levels.
Still, the reason behind it has a lot to do with the federation.
It has interest rates It has risen at a historic pace, pushing mortgage rates to record highs in more than a decade and making it harder for businesses to grow. Eventually, the Fed’s rate hikes should lower costs broadly. But in the meantime, consumers are getting the one-two punch of higher loan rates and higher prices, especially when it comes to necessities like food and housing.
Americans opened their wallets during the 2020 lockdowns, which pulled the economy out of a brief but severe pandemic recession. Since then, government subsidies have evaporated and inflation has taken root, raising prices at the fastest rate in 40 years, sapping consumers’ spending power.
Business has been booming across industries for much of the pandemic, even as historically high inflation eats into profits. This is (again) thanks to the resilience of American consumers, as businesses are often able to pass on their higher costs to consumers for higher profit margins.
But the earnings bonanza may not last.
In mid-September, a company whose fortunes serve as an economic bellwether shocked investors.
FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand is softening and earnings could drop more than 40 percent.
In the interview, the CEO was asked whether he believed the slowdown was a sign of a looming global recession.
“I think so,” he replied. “These numbers don’t translate well.”
FedEx is not alone. Apple stock fell on Tuesday after Bloomberg reported that the company had scrapped plans to ramp up production of the iPhone 14 after demand came in below expectations.
And just before the holiday season, when employers routinely ramp up hiring, the mood is now more cautious.
“We haven’t seen the typical September flurry of companies posting for temporary help,” said Julia Pollack, chief economist at ZipRickreuter. “Companies are hanging back and waiting to see what the conditions are.”
Wall Street has been battered, and stocks are now on track for their worst year since 2008 — in case anyone needed another grim historical comparison.
But last year was a very different story. Equity markets have thrived in 2021, with the S&P 500 up 27%, thanks to a massive infusion of money by the Federal Reserve. In the spring of 2020, he enacted a double-barreled monetary easing policy to prevent financial markets from collapsing.
The party lasted until the beginning 2022. But when inflation kicks in, the Fed begins to take a figurative punching bag by raising interest rates and ending its bond-buying program that has been driving the market.
The hangover was brutal. The S&P 500, Wall Street’s broadest gauge – And the index — which accounts for most Americans’ 401(k)s — fell 24 percent on the year. And not alone. All three major U.S. indexes are in bear markets — down at least 20 percent from their recent highs.
Unfortunately, the bond markets, especially safe havens for investors when stocks and other assets fall, are also in the doldrums.
Again, blame the feds.
Inflation, along with high interest rates from the central bank, causes bond prices to fall, which in turn increases bond yields (the return an investor gets on a government loan).
On Wednesday, the 10-year U.S. Treasury yield briefly rose above 4% to a 14-year high. That rise was followed by a sharp drop in response to the Bank of England’s intervention in its own volatile bond market — a corner of the financial world designed to stabilize, if not dull, tectonic movements.
European bond yields are also rising as central banks follow the Fed’s lead in raising rates to prop up their own currencies.
Bottom line: There are few safe places for investors to put their money right now, and that’s unlikely to change until that changes. Global inflation took hold and central banks loosened their grip.
Nowhere is the conflict of economic, financial and political problems more acute than in the United Kingdom.
Like the rest of the world, the UK has struggled with inflation due to the severe Covid-19 shock, followed by trade disruptions caused by Russia’s invasion of Ukraine. As the West cut off imports of Russian natural gas, energy prices rose and supplies dwindled.
Those events were bad in themselves.
But the prime minister’s Lease Trust government, which had just been installed a week ago, has announced a sweeping tax cut plan, with economists from both political stripes. They accused him of being orthodox at best, diabolical at worst.
In short, the Truss administration said it would cut taxes to encourage spending and investment for all Britons and, in theory, slow the recession. But the tax cuts are not funded, which means the government has to Taking debt to support them.
That decision sent shockwaves through financial markets and put Downing Street at loggerheads with the independent central bank, the Bank of England. Investors around the world sold UK bonds in droves, sending the pound to its lowest level against the dollar in 230 years. Like, since 1792, when Congress made the US dollar legal tender.
The BOE plans an emergency intervention to buy UK bonds on Wednesday. and restoring order in the financial markets. For now it has caused bleeding. But the effects of the Trusonomics turmoil are spreading far beyond the offices of bond traders.
Britons already reeling from cost-of-living inflation of 10% – the highest of any G7 economy – are now under threat of higher borrowing costs, forcing millions of homeowners to see their monthly mortgage payments rise by hundreds. Even thousands of pounds.
While the consensus is that a global recession will occur by 2023, it is impossible to predict how severe it will be or how long it will last. Not every recession is as painful as the Great Recession of 2007-09, but every recession sure hurts.
Some economies, notably the United States, with strong labor markets and robust consumers will be able to weather the damage better than others.
“We will be in uncharted waters in the coming months,” economists at the World Economic Forum wrote in a report this week.
“The immediate outlook for the global economy and much of the world’s population is bleak,” he added, adding that the challenges “will test the resilience of economies and societies and take a toll on humanity.”
But there are some silver linings, they said. Crises force changes that improve living standards and strengthen economies.
“Businesses have to change. That’s been the story since the pandemic started,” said Rima Bhatia, an economic adviser at Gulf International Bank. “Businesses cannot continue as they were. And that’s the silver lining.”
– CNN Business’ Julia Horowitz, Anna Cuban, Mark Thompson, Matt Egan and Chris Isidore contributed reporting.
