New York
CNN Business
—
Across the globe, markets are flashing warning signs that the global economy is teetering on the brink.
The question of recession is no longer if, but when.
Those flashing red pulses accelerated over the past week as markets grappled with the reality — once speculative, now certain — that the Federal Reserve will continue its most aggressive monetary tightening in decades to squeeze inflation out of the U.S. economy . Even if it means triggering a recession. Even if it comes at the expense of consumers and businesses outside the United States.
There is now a 98% chance of a global recession, according to research firm Ned Davis, which brings some sobering historical credibility. The company’s recession probability reading has only been this high twice before — in 2008 and 2020.
When economists warn of a recession, they usually assess it based on various metrics.
Let’s unpack five key trends:
The US dollar plays a huge role in the global economy and international finance. And now, it’s stronger than it has been in two decades.
The simplest explanation goes back to the Fed.
When the Fed raises interest rates, as it has been doing since March, it makes the dollar more attractive to global investors.
In any economic environment, the U.S. dollar is seen as a safe place to hold funds. In a volatile climate — such as a global pandemic or war in Eastern Europe — investors are more motivated to buy dollars, often in the form of U.S. government bonds.
While a strong dollar is a nice perk for Americans traveling abroad, it’s a headache for nearly everyone else.
Many currencies, including the pound, euro, yuan and yen, have fallen in value. This makes it more expensive for these countries to import essentials such as food and fuel.
In response, central banks already battling pandemic-induced inflation will eventually raise interest rates faster and faster to prop up the value of their currencies.
A stronger dollar has also had a destabilizing effect on Wall Street as many S&P 500 companies operate globally. According to one estimate by Morgan Stanley, every 1% gain in the U.S. dollar index has a 0.5% negative impact on the S&P 500’s earnings.
The No. 1 driver of the world’s largest economy is shopping. American shoppers are fed up.
After more than a year of rising prices for almost everything, consumers have held back as wages can’t keep up.
“The difficulty caused by inflation means that consumers are dipping into their savings,” Ernst & Young Parthenon chief economist Gregory Darko said in a note Friday. Daktronics said the personal savings rate remained unchanged at 3.5% in August, near the lowest level since 2008 and well below the pre-coronavirus level of around 9%.
Again, the reasons behind the pullback have a lot to do with the Fed.
Interest rates have Rising at a historic rate, pushing mortgage rates to their highest levels in more than a decade and making it harder for businesses to grow. Ultimately, the Fed’s rate hikes should generally reduce costs. But at the same time, consumers are being hit by high borrowing rates and high prices, especially on essentials like food and housing.
Americans opened their wallets during the 2020 lockdown, which lifted the economy out of a brief but severe pandemic recession. Since then, government aid has evaporated and inflation has taken root, pushing up prices at the fastest pace in 40 years and eroding consumers’ purchasing power.
Businesses across industries have been booming for much of the pandemic era, even as historically high inflation is eating into profits. That’s (again) thanks to the grit of American shoppers, as businesses have largely been able to pass on higher costs to consumers to cushion profit margins.
But the earnings spree may not last.
In mid-September, investors were stunned by a company whose fortunes acted as an economic bellwether.
FedEx, which operates in more than 200 countries, unexpectedly revised its outlook, warning that demand is weakening and earnings could plunge more than 40%.
In an interview, the company’s chief executive was asked if he saw the economic slowdown as a sign of a looming global recession.
“I think so,” he replied. “These numbers, they don’t bode well.”
FedEx is not alone. Apple shares fell on Tuesday after Bloomberg reported that the company scrapped plans to increase production of the iPhone 14 after demand fell short of expectations.
And just before the holiday season, when employers typically ramp up hiring, the mood is more cautious now.
“We haven’t seen the normal growth in companies that issued temporary help in September,” said Julia Pollak, chief economist at ZipRecruiter. “Companies are hesitating and waiting to see how it goes.”
Wall Street has been battered, and the stock market is currently on its worst year since 2008 — in case anyone needs another dire historical comparison.
But last year was a very different story. The stock market is booming in 2021, with the S&P 500 surging 27%, thanks to a massive cash injection from the Federal Reserve, which launched a two-pronged monetary easing policy in the spring of 2020 to prevent financial markets from collapsing.
The party goes on until the early hours of the morning 2022. But as inflation hit, the Fed started taking the proverbial wine glass, raising interest rates and unwinding the bond-buying mechanism that propped up the market.
Hangovers are cruel. The S&P 500, the broadest measure of Wall Street — The index responsible for most Americans’ 401(k)s is down nearly 24% this year. It’s not alone. All three major U.S. stock indexes are in bear markets — down at least 20% from their recent highs.
Unfortunately, the bond market, often a safe haven for investors when stocks and other assets fall, is also in disarray.
Blame the Fed again.
Inflation, combined with a sharp rise in central bank interest rates, has pushed bond prices down, leading to higher bond yields (that is, the return investors get on government loans).
On Wednesday, the yield on the 10-year U.S. Treasury bond briefly topped 4%, the highest level in 14 years. This was followed by a sharp decline by the Bank of England intervening in its own spiraling bond market — the equivalent of a tectonic movement in a corner of the financial world designed to remain stable, if not downright boring.
European bond yields are also surging as central banks follow the Fed’s lead in raising interest rates to prop up their currencies.
Bottom line: Investors have few safe places to invest right now, and that’s unlikely to change until Global inflation was brought under control, and central banks loosened controls.
The collision of economic, financial and political disasters is most painful in the UK.
Like the rest of the world, the UK has been grappling with price spikes, largely due to the huge shock of Covid-19, followed by disruption to trade caused by Russia’s invasion of Ukraine. Energy prices soared and supplies dwindled as the West cut off imports of Russian gas.
These events are bad enough on their own.
But just over a week ago, the government of newly installed Prime Minister Liz Truss announced a sweeping tax cut, with economists from both ends of the political spectrum. Condemned as unorthodox at best, diabolical at worst.
In short, the Truss government has said it will cut taxes for all Britons to encourage spending and investment and, in theory, soften the blow of the recession.But the tax cuts are not funded, which means the government has to Take on debt to finance them.
The decision sparked panic in financial markets and brought Downing Street to an impasse with its independent central bank, the Bank of England. Sterling fell to its lowest level in nearly 230 years against the dollar as investors around the world dumped British bonds. For example, Congress has adopted the U.S. dollar as legal tender since 1792.
The Bank of England made an emergency intervention to buy UK bonds on Wednesday and restore financial market order. The bleeding stopped temporarily. But the ripple effects of Trusonomics’ turmoil are reaching far beyond bond traders’ offices.
Britons already caught in a cost-of-living crisis with inflation at 10% – the highest of any G7 economy – are now panicking about higher borrowing costs that could force millions of homeowners to make monthly mortgage payments Add hundreds or even thousands of pounds.
While the consensus is that a global recession could occur sometime in 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 is certainly painful.
Some economies, especially the U.S., with strong labor markets and resilient consumers, will be able to withstand the blow better than others.
“We will be in uncharted territory for the next few 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,” they continued, adding that these challenges “will test economic and social resilience and take a heavy toll.”
But there are some silver linings, they say. The crisis forces a transformation that can ultimately improve living standards and make the economy stronger.
“Businesses have to change. That’s been the story since the pandemic started,” said Rima Bhatia, an economic adviser at Gulf International Bank. “Businesses can no longer continue on their old path. This is an opportunity and a silver lining.”
— CNN Business’s Julia Horowitz, Anna Cooban, Mark Thompson, Matt Egan and Chris Isidore contributed reporting.