The risk of Europe and the United States entering recession has increased sharply, warn economists consulted by the Financial Times, ahead of the G7 Summit that starts this weekend. Specialists are pessimistic in view of the tightening of the monetary policy of the US Federal Reserve (Fed) and the worsening of the gas supply crisis in Europe.
“What used to be a rising risk has now turned into a very likely scenario,” said Holger Schmieding, chief economist at Berenberg Bank. Goldman Sachs has doubled the probability that the US will enter a recession to 30%, and it is possible that this crisis will reach the US economy as early as the next two years, according to the investment bank’s estimates.
“US recession risks are growing and visible. I would point to a 40% probability of entering a recession in the next 12 to 24 months”, defended Mark Zandi as well. The chief economist at Moody’s goes further and even says that Europe is even more vulnerable than the US.
“To avoid recession, the world economy needs a little luck, and it needs the economic consequences of the pandemic and the conflict in Ukraine, and the monetary policy of the Fed and other central banks to end quickly,” added Zandi.
Faced with this scenario, Martin Wolburg, an economist at Generali insurer, warns that “if Russia cuts off gas supplies to the EU completely, the bloc would be hit by a recession”.
Peter Hooper, a Deutsche Bank economist and former Fed official who in April became one of the first Wall Street experts to predict a recession, warned that the short-term inflation picture “doesn’t look good”, meaning that the central bank may need to raise interest rates even more aggressively than expected.
The Fed decided to raise interest rates on federal funds by another 75 basis points at the last meeting. This week, Central Bank Governor Jerome Powell reiterated the central bank’s commitment to fighting inflation, while another Federal Reserve member, Michelle Bowman, this Thursday voiced support for an interest rate hike by 75 points. basis in July, followed by further increases of 50 basis points.
In Europe, the European Central Bank (ECB) pointed – at the end of the last Monetary Policy Council meeting – to an increase of 25 basis points in July and another increase of equal or greater magnitude in September.
The monetary authority also projected that next year the Eurozone economy will decelerate to 3.5% and 2.1% in 2024, still above the 2% target. These figures are higher than the projections released in March when the ECB pointed to an inflation rate of 5.1% this year, 2.1% in 2023, and 1.9% in 2024.
This week, the ECB stressed, through an ‘outlook’ carried out by several central bank specialists that Europe “is far from a stagflation scenario” like the one of 1970, as “current projections for real GDP growth are still partly reflect a recovery in demand after the pandemic.”
Source: with agencies