Wednesday, December 07, 2022

The ‘recession duel’ between the Eurozone and the US: where will the recession deepen?

Both the Eurozone and US economies will suffer. Experts agree that a recession is here and that a slowdown – at least technically, a contraction in gross domestic product (GDP) for two consecutive quarters – will be inevitable in both sectors. The specifics are understanding of when it will start, its depth and how long it will last. In this task, a major doubt arises: which of the two economies will be left more on edge?

In his latest ‘Global Letter’, the analyst Bank of America (BofA) Ethan Harris acknowledges that a common question among bank customers is who will face a tough recession next year in the US or the euro area. Although the answer is tough and there are almost more forecasts than data, strategists cite the firm’s two separate analysis teams, American and European.

From the other side of the Atlantic, Michael Gapen and his team forecast an annual GDP of -1.5% for the US in the first three quarters of next year. For the euro area, Rubén Segura and his team saw an annual decline of 1.2% in the fourth quarter of 2022 and 1.6% in the first quarter of 2023. In ‘more European’ terms, GDP contraction of 0.3% in the last quarter of this year and 0.4% in the first quarter of next year. Global growth for the next year has been placed at 0% (0.3 percentage points lower than their previous forecast).

Since these figures do not make it clear who will face the worst recession – the European Commission will update its figures for the region at the end of the week – Harris approaches the question from three perspectives: the starting point, the nature of the shock and the foundation of inflation. . they conclude that USA has more ballots to experience a greater decline—its GDP has more room for decline as it grew more post-pandemic—but at the same time, Risks around the Eurozone are more sensitive,

Harris begins by pointing out that the US and the euro area are facing a new year different points In their respective economic cycles: the first grew by 0.6% in the third quarter of 2022 and the bloc grew a modest 0.2% due to the resilience of Germany. “The US is clearly hot, especially its labor market. The unemployment rate is remarkably low. Job openings remain well above any previous peak. Wage growth is very strong and shows little sign of easing In contrast, most indicators suggest that the eurozone has not fully recovered from the pandemic: unemployment rates are low, but working hours are not at pre-pandemic levels from normal and participation rates continue to rise. Furthermore, most measures of the output gap suggest that sluggishness remains and wage growth has picked up only slightly,” he explains.

to expand zoomThe US canvas leaves other traces that have been summarized by Slavena Nazarov, an analyst at Credit Agricole: “Although the rebound in activity confirms that the US economy is not currently in recession, it does not in short eliminate the risk of recession. Duration. Solid rebound in GDP during the quarter hides weakness in underlying demand Slowdown in domestic consumption explained by slowdown in services consumption and continued decline in spending on goods Private non-residential investment being pulled down Continued investment in infrastructure, which declined for the sixth consecutive quarter, while the decline in durable goods orders suggests that this negative trend is likely to continue in the coming months.”

Refining specifications, Harris points out inflation, In the case of the US, he emphasized, a ‘white-hot’ American consumer played a major role in causing this global problem: “Driven by record financial transfers and unable to spend on many services, American consumers themselves A goods binge: At the peak of the second quarter of 2021, real spending on goods was 18% higher than its level in the fourth quarter of 2019. Spending has declined since then, but above the previous trend of the pandemic. Weak US demand is likely to continue to cool global commodity prices.”

The problem in Europe is energy. The analyst confirmed that Europe is facing Shock too much energy Whereas the US is practically free in terms of energy, as its exports are equal to its imports. Therefore, raising prices benefits American producers as much as they harm consumers. Instead, he says, Europe relies heavily on the “world’s least reliable” source of energy: Russian natural gas. And more importantly, because of limitations in the ability to move energy in and out of Europe, the energy price shock in Europe is much worse, especially compared to the US, he stressed.

This means that the factors underlying inflation are very different and demand a different monetary policy response, Harris concludes. “Both regions face a high risk of second-round effects from rising inflation expectations. However, the evidence in Europe is weak, given still moderate wage growth. Europe doesn’t need to chill its labor market to reduce inflation. Instead, the Federal Reserve has to do the dirty work of reducing the demand for labor and matching it to the supply of labor. Added to this is the fact that the repressed demand for labor in the US makes it very difficult to cool the labor market. So the Fed has to deal with both the risks of the second round of impacts and the first round effects of the overheated labor market.”

This reading translates into an obvious one: a forecast that Fed tightening will be too much Compared to the European Central Bank (ECB), which will have some impact on growth. BofA experts, like the market, see the Fed terminal rate for this cycle of around 5%, while they envision the ECB at 2.5%, albeit with a “significant risk” of reaching 3%. “Currently, the two central banks are moving at more or less the same pace, but the Fed started earlier and is likely to end later,” Harris said.

“We think the U.S. is going to face some major recession as the Fed tries to push the economy to below capacity above capacity. If the central bank wants to rein in labor cost inflation in a timely manner, we think This would have to be achieved by increasing the unemployment rate by about 2%”, clarifies the analyst. The rate is now 3.7% and in its latest forecasts published in September, the Fed considers unemployment of 4.4% by 2023.

debate across Europe

Diagnostics clashes with forecasts from other important firms, such as black Rock, Economists from his Investment Institute stressed in their September and October panels that a recession could happen in the US next year, but could be quicker and deeper in the euro area given the energy crisis: “Europe of Russian energy disinvestment The U.S.’s efforts have triggered a price increase that has been exacerbated by Russia’s cuts in gas supplies. The European Union now spends about 12% of its GDP on energy, a crisis even greater than the oil shock of the 1970s. gets worse. Not so for the US, which is a net exporter of energy. In our opinion, with rations on the horizon, it is difficult to see any relief for Europe in the next two years.”

From BofA, instead, come Encouraging factors in EuropeEffective coordination of energy policy across the region, effective conservation and creation of energy reserves, financial compensation to mitigate the energy shock, and structural financial support to meet post-pandemic challenges. However, they do not forget that the outlook is very uncertain: “We cannot rule out further disruptions in the energy market due to further supply disruptions. If the war in Ukraine escalates, Europe is in the grip of a crisis of confidence and Europe Quite weak. For a colder than usual winter.”

“Although the euro area has done its homework by reducing energy demand and filling reserves for next winter, a recession appears inevitable given the accumulated compression of real income and the need for energy savings and a little rationing. But that slowdown, Again, the highlight is Rubén Segura’s team, which is likely to fall short of the consensus even a few weeks ago”.

However, the reference will also bring very slight recovery: “Russian energy shortage will become a more serious problem next year. This means that the recovery after the winter recession will be very superficial. Not enough energy to freely resume activity if governments want to stop the winter . have to keep”.

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