The economic consensus now sees the risk of a recession in the US increasing, while the risk of a recession in the UK and the euro area is decreasing. Will this trend continue?
The situation does not seem so bad – at least at first glance. In the past week, initial jobless claims in the US rose sharply. In the past, this usually followed a recession. However, this increase is apparently due to a fraud in Massachusetts. According to research from Deutsche Bank, this upward trend reverses again if the calculations are adjusted for manipulated utilities.
In addition, fears that US regional banking problems could lead to a credit crunch were allayed by new data last week. Neither the central bank’s senior credit officer survey nor the small business survey showed a decline in credit availability. On the contrary: they also registered an increase.
US recession risk despite positive data
So, are economists wrong about the risk of a US recession? Not according to Bell: “I stand by my forecast of a recession in the U.S. by the end of this year. A credit crunch may have been averted, but a tightening is still underway,” said Steven Bell, chief EMEA economist at Columbia Threadneedle Investments. Credit is still available, but conditions have become more difficult – And interest rate hikes are also having an impact. “Borrowers are restricting their demand for credit and consumers are running out of steam,” Bell sums up the situation. The latter put a lot of pressure on so-called Covid bills last year, but now there are signs that this support may not be forthcoming. And the chief economist expects more clarity on the outlook for U.S. consumer spending from retail sales figures and earnings reports from companies like Home Depot.
Europe and the UK are on the rise
If the US slips into recession by the end of the year, will the UK and Europe follow suit? Bell doesn’t think so: “Economic data from Europe and the UK should continue to improve over the course of the year,” says the chief economist. As energy prices fall, consumer confidence is rising in both countries. This, in turn, leads to higher costs. Additionally, according to Bell, these trends are likely to continue across organizations.
But what does this mean for financial markets? A US recession means US stocks are falling. “Given the prevailing pessimistic sentiment among analysts and investors, any decline is likely to be modest,” Bell said. “However, equities in the US are likely to underperform relative to Europe and the UK. Additionally, US interest rates are also likely to decline by the end of the year – even if they continue to rise before then.” That means the dollar’s gains over the past week may prove temporary, and finally, US bonds should also recover after some volatility.
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