5 Indications the Global Economy is Navigating Towards Recession

In the vast expanse of global markets, warning signals are illuminating, indicating that the world economy is precariously balanced on the edge of a precipice.

The looming question shifts from if a recession will occur to when it will strike.

Recent days have seen a hastening pulse of those crimson indicators, as markets confront the stark reality — previously speculative, now certain — that the Federal Reserve is committed to an exceptionally aggressive monetary tightening campaign, aimed at curbing inflation within the US economy. Even if this entails precipitating a recession, even if it exacts tolls on consumers and enterprises far beyond American shores.

Research by Ned Davis, a respected firm, now places the likelihood of a global recession at 98%, lending historical gravitas to the forecast. The firm’s recession probability gauge has soared to such heights only twice in the past — in 2008 and 2020.

When economists signal an impending downturn, they typically rely on a multitude of indicators.

Let’s dissect five pivotal trends:

1. The Dominance of the US Dollar
   The US dollar wields disproportionate influence in the global economic landscape and international financial systems. Presently, it stands stronger than it has in two decades. The rationale is straightforward — it boils down to the actions of the Federal Reserve. With each uptick in interest rates orchestrated by the US central bank since March, the allure of the dollar heightens for investors worldwide. In any economic climate, the dollar serves as a bastion of safety for investments. In turbulent times — such as during a global pandemic or amidst conflicts like those in Eastern Europe — investors find even greater impetus to seek refuge in the dollar, typically in the form of US government bonds. While a robust dollar may benefit Americans traveling abroad, it poses challenges for others. The values of currencies like the UK pound, the euro, China’s yuan, and Japan’s yen, among others, have plummeted. This escalation makes it costlier for these nations to import essential commodities such as food and fuel. Consequently, central banks, already grappling with pandemic-induced inflation, are compelled to hike rates more aggressively to shore up the values of their respective currencies. The dollar’s strength also reverberates through Wall Street, affecting many S&P 500 companies engaged in global operations. According to estimates by Morgan Stanley, a mere 1% uptick in the dollar index translates to a 0.5% dip in S&P 500 earnings.
2. Stalling of America’s Economic Engine
   Consumer spending is the primary driver of the world’s largest economy — and American consumers are showing signs of fatigue. After enduring over a year of escalating prices across the board, with wages failing to keep pace, consumers are scaling back. “Inflation-induced hardships compel consumers to dip into their savings,” remarked EY Parthenon Chief Economist Gregory Daco in a recent note. He highlighted that the personal saving rate in August stagnated at a mere 3.5% — hovering near its lowest level since 2008 and significantly below its pre-Covid level of approximately 9%. Once again, the Federal Reserve’s actions lie at the crux of this retrenchment. Interest rates have soared at an unprecedented rate, propelling mortgage rates to their highest levels in over a decade and hindering business expansion. While the Fed’s rate hikes are anticipated to eventually alleviate costs across the board, consumers are presently grappling with a dual onslaught of high borrowing rates and soaring prices, particularly for essentials like food and shelter. Americans exhibited robust spending during the lockdowns of 2020, propelling the economy out of a brief yet severe pandemic-induced recession. However, with waning government assistance and entrenched inflation, prices have surged at their fastest pace in four decades, eroding consumers’ purchasing power.
3. Corporate America Tightens its Belt
   Business activity has flourished across sectors throughout much of the pandemic era, despite historically high inflation eroding profit margins. This resilience can be attributed, once again, to the steadfastness of American consumers, as businesses largely managed to pass on increased costs to cushion profitability. However, this earnings surge may be short-lived. In mid-September, a company serving as a bellwether for economic trends startled investors. FedEx, with operations spanning over 200 countries, unexpectedly revised its outlook, cautioning that demand was softening and earnings were poised to plummet by more than 40%. When asked if this slowdown signaled an impending global recession, the CEO responded affirmatively, stating, “I think so. These numbers, they don’t bode well.” FedEx is not an isolated case. Apple’s stock stumbled recently after reports indicated the company was shelving plans to ramp up iPhone 14 production due to lower-than-expected demand. Moreover, as the holiday season approaches, typically a period of heightened hiring by employers, the atmosphere is noticeably more cautious. “We’ve observed a departure from the usual September surge in companies seeking temporary help,” remarked Julia Pollak, chief economist at ZipRecruiter. “Companies are adopting a wait-and-see approach.”
4. Welcome to Bear Territory
   Wall Street is reeling from volatility, with stocks hurtling toward their worst performance since 2008 — adding yet another disconcerting historical parallel to the mix. However, last year presented a vastly different narrative. Equity markets thrived in 2021, with the S&P 500 skyrocketing by 27%, fueled by a deluge of liquidity injected by the Federal Reserve. This monetary stimulus, initiated in the spring of 2020, aimed to prevent financial markets from unraveling. The revelry persisted until early 2022. However, as inflation took hold, the Federal Reserve commenced the process of reining in its expansive measures, hiking interest rates and unwinding its bond purchases that had buoyed the market. The aftermath has been harsh. The S&P 500, the premier gauge of Wall Street sentiment — and the index underpinning the majority of Americans’ 401(k)s — has plummeted by nearly 24% year-to-date. And it’s not alone; all three major US indexes have entered bear market territory, down at least 20% from their recent peaks. In an ironic twist, bond markets — typically a bastion of safety for investors amid stock market downturns — are also in turmoil. Once again, the Federal Reserve bears responsibility. Inflation, coupled with the central bank’s aggressive interest rate hikes, has driven bond prices lower, causing bond yields (the returns investors earn on government loans) to surge. On Wednesday, the yield on the 10-year US Treasury briefly eclipsed 4%, reaching its highest level in 14 years. This surge was followed by a precipitous decline prompted by the Bank of England’s intervention in its own tumultuous bond market — marking seismic shifts in a financial domain renowned for stability, if not outright dullness. European bond yields are also skyrocketing as central banks follow the Federal Reserve’s lead in hiking rates to shore up their respective currencies.
5. War, Soaring Prices, and Radical Policies Collide
   Nowhere is the confluence of economic, financial, and political crises more starkly evident than in the United Kingdom. Much like the rest of the world, the UK has grappled with soaring prices stemming from the seismic shockwaves of Covid-19, compounded by trade disruptions triggered by Russia’s incursion into Ukraine. As Western nations curtailed imports of Russian natural gas, energy prices surged and supplies dwindled. These events constituted significant challenges in their own right. However, just over a week ago, the newly formed government under Prime Minister Liz Truss unveiled a sweeping tax-cutting initiative that economists across the ideological spectrum have criticized as unconventional at best and disastrous at worst. In essence, the Truss administration announced plans to slash taxes for all Britons to stimulate spending and investment, ostensibly to cushion the impact of a looming recession. However, these tax cuts are unfunded, necessitating government borrowing to finance them. This decision triggered panic in financial markets and plunged Downing Street into a standoff with the independent central bank, the Bank of England. Investors worldwide offloaded UK bonds en masse, sending the pound to its lowest level against the dollar in nearly 230 years — since 1792, when the US dollar was established as legal tender. The Bank of England intervened urgently to purchase UK bonds on Wednesday, restoring order in financial markets — albeit temporarily. However, the reverberations of the tumult in Trussonomics extend far beyond the confines of bond traders’ offices. Britons, already grappling with a cost-of-living crisis, with inflation at 10% — the highest among G7 economies — are now apprehensive about soaring borrowing costs that could hike monthly mortgage payments for millions of homeowners by hundreds or even thousands of pounds.

Conclusion

While the prevailing consensus suggests a global recession looms on the horizon in 2023, predicting its severity or duration remains a challenge. Not all recessions replicate the pain of the 2007-09 Great Recession, but each recession exacts a toll, nevertheless.

Some economies, notably the United States, with its robust labor market and resilient consumers, may weather the storm better than others.

“We are charting unfamiliar waters in the months ahead,” noted economists at the World Economic Forum in a recent report.

“The immediate outlook for the global economy and much of the world’s population appears grim,” they continued, underscoring that these challenges “will test the resilience of economies and societies, exacting a heavy human toll.”

However, amidst the gloom, there are glimpses of hope. Crises catalyze transformations that can ultimately enhance living standards and fortify economies.

“Businesses must adapt. This has been the narrative since the onset of the pandemic,” remarked Rima Bhatia, an economic advisor at Gulf International Bank. “Businesses can no longer tread the path they once did. That’s the opportunity, and therein lies the silver lining.”