Are We Headed For A Worldwide Recession? A Brief Survey of the Global Economy

Not a week goes by that we don’t hear someone on Wall Street predict that we’re headed into a significant recession, just ahead. I have followed many of these financial pundits for years and generally respected their opinions.

Today, we’ll test those prognostications with a simple, straightforward survey of the world’s major economies. We’ll look at three factors: Are the economies in these countries growing or contracting? Is inflation rising or falling? And perhaps most importantly, what is the reaction from their central banks, measured in their current interest rate policy?

Read this as you would a weather report, giving the current conditions globally, to ascertain whether a storm is headed our way.

Europe — Storm Clouds Are Here

Europe is currently experiencing the most difficult economic situation in the world, as it is feeling the full impact of “Stagflation,” that deadly combination of low growth and higher prices. We’ve selected five countries to represent the European region: Austria, the Czech Republic, Germany, Hungary, and the United Kingdom. All are experiencing rising inflation, with either flat or declining economic growth.

A principal cause of these higher prices is the loss of low-cost energy. Germany is an especially pertinent example. In 2023, Germany shut down the last nuclear power plant less than a year after losing the Nordstream II Pipeline, which supplied cheap Russian natural gas to Germany. This double whammy has caused German energy prices to skyrocket, most recently resulting in Volkswagen, the iconic German Automaker, announcing that it will likely shutter some plants next year for the first time in its history.

High energy costs have caused inflation to rise across all five of our survey countries while slowing GDP growth (the Czech Republic is the sole exception, exhibiting a slight rise in GDP).

This presents their central banks with a real dilemma: promote economic growth or fight inflation. Which to choose? So far, three of the central banks, the Banks of Germany, the Czech Republic, and the U.K., have already cut interest rates, and it is assumed that the other two will follow at their next meeting.

Conclusion: The Survey indicates that Europe is on the verge of a major downturn, driven primarily by high energy costs. We expect lower interest rates from the European Central Bank, the ECB, meeting this week.

The Global South

A very different picture emerges when examining the Global South, those countries made up principally of the BRICS Nations. Of the five countries in our survey, only China exhibits a declining economic growth rate. The others, Brazil, India, Russia, and Saudi Arabia, are all experiencing expanding economic growth. What’s more, except for Russia, all have virtually no inflation.

Russia, of course, is the exception to most of the trends within the Global South, as the War in Ukraine is weighing upon its Economy. Earlier this year, President Putin announced that the country would move to a war footing, disrupting the normal function of the “civilian” Economy. We look for the Russian Central Bank to continue fighting higher prices by maintaining its high interest rate (18%).

China presents the most significant risk to economic growth. The Chinese Economy has slowed precipitously to less than 1%, a level not seen outside the Pandemic. The People’s Bank of China has held interest rates steady in its most recent meeting but look for those rates to fall if the Economy continues to slow. Undoubtedly, Chinese leader Xi Jinping is committed to maintaining economic growth and price stability in the Middle Kingdom. As Stephen Roach, retired Morgan Stanley Asia Chairman, quipped, “Xi Jinping is now the Chief Economist of China.”

Conclusion: The Global South also suffers from inflation and slow growth, but those twin economic ills seem confined to two countries: inflation in Russia and slow growth in China. Of all the areas in our survey, the Global South appears to be the most resilient. However, it is not immune from a major slowdown with its trading partners, particularly in Europe and North America.

The North America Trio

The United States is, by far, the most significant trading country in the world, and, as such, it exerts tremendous influence over the Global Economy. However, it lost much of its financial influence when it drove Russia off of the US/EU trading platform, the SWIFT International Settlements System.

In Q2, the United States announced that its Economy grew at 3.0%, one of the highest levels around and double the growth rate of the quarter before. Combined with a declining inflation rate, this should put the Federal Reserve in a favorable position to maintain its current interest rate policy.

However, as we’ve seen, much of the world suffers from slowing economic growth, a sign of eminent recession. This is especially true for our chief allies in Europe. Moreover, the Fed’s current monetary policy is much more restrictive than it appears.

Remember that Quantitative Easing we enjoyed during the COVID-19 pandemic when the Fed grew its “balance sheet” by roughly $7 Trillion? Well, it’s time to take that QE back. Since July 2022, the Fed has been doing just that, removing approximately $1.8 trillion from the financial system. (Briefly: it’s done this by selling the Treasury Securities it bought earlier, taking money out of circulation, and reducing its balance sheet.)

It’s hard medicine, but most economists agree that it’s needed to maintain our financial system’s long-term stablity. In short, we’re paying back now for the stimulus we got earlier. This suggests that the Fed is continuing its fight against inflation.

Many on Wall Street, myself included, believe that the Fed has gone too far in fighting inflation and should now be moving to forestall a developing economic slowdown, like what’s developing globally. Six of the 13 countries in our survey are experiencing slowing economic growth, while 3 or 4 more have very tepid (but still positive) growth. Rising inflation remains confined to Europe, with its higher energy costs, and Russia, with its war economy.

Of course, whether to promote economic growth or fight inflation is a judgment call. However, in his latest remarks at the Jackson Hole Symposium, Chairman Jerome Powell seemed amenable to cutting interest rates, but not just yet.

“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

https://www.federalreserve.gov/newsevents/speech/powell20240823a.htm

Increasingly, the Global Economy hangs by a thin thread. Five of the 13 countries’ central Banks have already cut interest rates, with the European Central Bank expected to cut this week. They all sense that the current risk is to economic growth.

Indeed, Chairman Powell said that the “direction of travel is now clear.”

How long will it take the Federal Reserve to begin?