U.S. stocks posted their worst first half in more than 50 years, while their European counterparts ended with their worst since the 2008 global financial crisis. Investors fear that interest rate hikes by central banks will put a damper on Rampant inflation is pushing the United States, the world’s largest economy, and Europe into recession.
Soaring energy and food prices are prompting central banks such as the European Central Bank and the US Federal Reserve to tighten the money taps despite their economies struggling with the shocks caused by the war in Ukraine and the COVID-19 pandemic. This, most experts say, creates a recipe for an economic downturn.
Amid all the sluggishness in the economy, however, there are signs that a recession is not a certainty – unlike, for example, 2008 or after the pandemic, when it was clear that the economy was falling off a cliff and a contraction was inevitable. And even if a recession were to occur, it would not cause the amount of economic pain witnessed during these recessions. Here’s why.
Consumer spending remains strong
People continue to spend on goods and services despite soaring inflation and recession worries. Consumer spending, which accounts for more than half of economic activity in the euro zone and even more in the United States, is rebounding strongly from pandemic lows as cash-rich households go on a shopping spree.
“Consumption is one of the pillars of growth we’re looking at. It’s the largest component of GDP. The kind of pent-up demand we’re seeing from consumers is going to support the outlook,” the economist said. Rory Fennessy of Oxford Economics. told DW, adding that he does not yet see the euro zone slipping into a recession.
While warning of an increased likelihood of a recession in the United States, analysts at investment bank Goldman Sachs said in May that strong consumer spending remained a bright spot that could help secure a so-called soft landing. smooth for the economy – where inflation is kept under control without actually causing a recession.
“The surpluses generated today by high-yielding households and businesses bolster the outlook for consumer spending and business investment – and will help offset the [Fed] headwinds from politics and inflation,” the analysts wrote in a note to clients. “The healthy financial balance of the private sector widens the Fed’s narrow runway for a soft landing.”
A savings vault worth trillions
The recovery in consumer spending has been supported by the massive savings that eurozone households have accumulated during the pandemic. People have been locked in their homes for months, leading to them hoarding hundreds of billions of euros in cash and bank deposits.
With generous government stimulus packages during the pandemic and household incomes holding up reasonably well in a strong job market, consumers are conserving cash they could potentially spend over the next two years and helping to maintain remote recession.
“Savings is kind of a backbone. If consumption is going to grow, even modestly, that’s one of the reasons why,” Fennessy said.
The International Monetary Fund (IMF) estimates that consumers in the eurozone have 1 trillion euros ($1.03 trillion) in pandemic-related savings, or about 8% of total gross domestic product (GDP) of the euro zone. American consumers have more than 2,000 billion dollars (1,950 billion euros) of excess savings.
Andrew Kenningham, chief economist for Europe at Capital Economics, however, does not pin his hopes on excess savings preventing a recession. He argues that the savings are concentrated among high earners who already have abundant disposable income anyway and are less likely to spend their savings. Low-income households are the hardest hit by rising energy prices, experiencing larger declines in their real incomes. Often they have no excess savings to draw on to maintain their standard of living.
“So the surplus savings will help, but not as much as you might expect,” told DW Kenningham, who has a recession penciled into his forecast.
Booming service sector
Sectors such as tourism, travel and hospitality are seeing a strong rebound as COVID restrictions are lifted, as evidenced by chaos at airports and rising hotel prices, adding to hopes that ‘a recession is not over yet.
High-contact services have been hit hard by shutdowns and travel restrictions, with people switching to buying goods from the comfort of their homes. Today, services are experiencing a resurgence thanks to pent-up demand.
“The recovery is well underway, driven by services. We are seeing a shift from goods to services,” ECB President Christine Lagarde said in June.
The services sector is an important driver of overall economic activity in advanced economies, accounting for more than 70% of total output in the euro area and around 80% in the United States.
Vacancies remain high amid staff shortages, particularly in the tourism and hospitality sectors
Labor markets remain strong
Low unemployment rates in the United States and Europe are another hopeful factor. Strong labor markets are one of the main reasons why household incomes have remained relatively stable despite the pandemic destroying the economy.
The euro zone labor market has exceeded expectations since the start of the pandemic, with the unemployment rate falling to a new record high in May. A strong recovery in tourism and hospitality should continue to support job growth even as the outlook dims in the industrial sector, which is suffering from supply chain disruptions and rising labor costs. ‘energy.
“It’s a very unusual situation where the economy is weak, but the job market is strong,” Kenningham said. “This means that even if growth slows to zero or slightly below zero, we don’t expect unemployment to rise massively, and that will help prevent a recession from getting too deep.”
Governments to the rescue
The economy is further supported by the continued easing of fiscal rules in the Eurozone, which means that governments are not yet required to tighten the purse strings. In fact, governments have put in place policies to reduce energy tax, provide cheap public transport and help businesses with loans if they are struggling with exorbitant energy costs.
Southern European economies, which are already seeing rising borrowing costs following the ECB’s hawkish turn, stand to benefit from the billions in funds disbursed under the NextGenerationEU economic stimulus package.
Major European economies like Germany – with relatively low levels of debt as a percentage of GDP – still have plenty of purchasing power to help stave off a recession, experts say.
According to Kenningham, unlike the 2008 recession, which was caused by a credit crunch and a collapse in asset prices, the recession this time would be caused by a drop in real household incomes due to the increase in energy price.
“I don’t think it will be as bad as 2008,” Kenningham said. “There is unlikely to be a credit crunch as banks are in fairly good shape and asset prices are unlikely to collapse. We do not expect a collapse in property prices, which may also cause a larger drop.”
Edited by: Uwe Hessler
