Can we avoid a global recession? That largely depends on the US

Falling consumer confidence and stock sell-offs have sparked concern about a growth slowdown in the US, which given its economic size could drag down the rest of the world with it
However, a US downturn is not inevitable, especially given the healthy state of the labour market

Kerry Craig

Published: 3:30am, 28 May 2022

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Fears are growing that the global economy is about to fall into a recession, having only recently recovered from the last one. There are plenty of reasons to justify the worries. The energy crisis in Europe, the rising cost of living, the global fallout from China’s Covid-19 restrictions and the potential for central bank errors in overtightening policy all present threats to the growth outlook.

The real risk, though, is not to the global economy or regional economies, though the euro zone will be hard-pressed to avoid a recession. Instead, it is to the US economy and whether the United States will suffer another recession, which, given its economic size, could drag down the rest of the world with it.

What exactly is a recession? The dictionary defines it as two consecutive quarters of negative economic growth, but this is a narrow view. Official growth figures are frequently revised when better-quality data is collected, and what was a contraction could be corrected later in the official tally.

A broader definition applied by the US National Bureau of Economic Research – the official source for US recessions – is a significant decline in economic activity which spreads across the entire economy, lasts more than a few months and includes a variety of economic indicators to measure the decline, including the jobs market and consumer spending.

The ability and willingness of households to spend is paramount to the growth outlook, and that is why some of the recent warnings from US retailers are fuelling recessionary concerns. Consumption accounts for almost 70 per cent of the US economy when measured by expenditure.

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Economic pessimists point to the decline in consumer confidence to levels not seen in years as evidence that higher prices are taking their toll. Meanwhile, some notable consumer stocks in the US have faced heavy selling pressure recently after warnings about the consumption outlook.

Undoubtedly, consumers around the world are feeling the squeeze from rising prices on daily household goods, contributing to fairly depressed levels of confidence. A downturn is not inevitable, though, and the health of the labour market could play a big part in how consumers react to the financial strain.

Consumer spending could remain resilient if household incomes rise in real terms. If the pace of inflation starts to moderate while wage growth in the US remains high, the impact on consumer purchasing power will lessen.

With almost two jobs available for every unemployed person in the US, the incentive to move for higher pay, to ensure household income keeps rising, works to offset some consumer concern. The flipside is that a rise in US jobless claims and a reversal in employment trends would be a more worrying sign.

The other part of the wealth story is the housing market. The value of a home can have a large bearing on how wealthy people feel. US mortgage rates are rising and the housing market is showing signs of cooling.

However, the shift from variable- to fixed-rate mortgages means homeowners might be less vulnerable to higher rates. Those who are exposed may be able to fall back on savings. The savings buffer that US households built up during the pandemic has diminished but is not depleted and savings could continue to fund spending as prices rise.

US dollar bills are seen in Cleveland, Ohio, on January 28. Inflation is at a 40-year high in the United States. Stocks are sinking. The Fed is making borrowing costlier. Home sales are down, and mortgage rates are up. Photo: AP

The probability of the US economy dipping into recession has risen, given the global headwinds to growth, but it is not yet at an alarming level. With the boost from the post-pandemic recovery and strong fiscal support having worn off, lower growth rates can be expected later in the year. This trend is likely to continue into 2023.

Just like riding a bicycle, the slower you go, the more likely you are to fall. A slow-moving recovery faced with a potential outside shock or policy error by the Fed – which continues to tighten policy to bring inflation back in line with its target – could tip the economy from expansion into recession. But this is a story for next year.

Kerry Craig is a global market strategist at JP Morgan Asset Management