Fear of US Recession Creates Gloomier Global Outlook

Supply chain disruptions caused by Covid-19 curbs in China and Russia’s invasion of Ukraine have slowed manufacturing growth in Asia and Europe, but analysts are also concerned about the threat of a possible recession in the United States.

High prices in the euro zone hit demand for manufactured goods in June at the fastest rate since May 2020 when the coronavirus was taking hold, with S&P Global‘s headline factory Purchasing Managers’ Index (PMI) falling to a near two-year low of 52.0 from 54.6.

A Reuters poll had predicted a more modest drop to 53.9 but the index nudged closer to the 50 mark, which separates growth from contraction.

“June’s euro zone PMI surveys showed a further slowdown in the services sector, while output in the manufacturing sector now seems to be falling outright,” Jack Allen-Reynolds at Capital Economics said.

“With the price indices remaining extremely strong, the euro zone appears to have entered a period of stagflation.”

There is a roughly one in three chance of a recession in the bloc within 12 months, economists predicted in a Reuters poll published earlier on Thursday. They also said inflation – which hit a record high of high of 8.1% last month – was yet to peak.

Powell Admits a Recession is Possible

Jerome Powell, chair of the Federal Reserve, said on Wednesday the central bank was not trying to engineer a recession in the United States to stop inflation but was fully committed to bringing prices under control even if doing so risks an economic downturn.

He acknowledged a recession was “certainly a possibility”.

Inflation continues to run at least three times higher than the Fed’s targeted level of 2% and it is expected to deliver another 75 basis point interest rate hike next month, according to economists polled by Reuters.

Despite Powell’s comments a few primary dealers have either started predicting a recession as early as this year or have brought forward their recession calls.

US investment firm PIMCO warned on Wednesday that central banks tightening monetary policy to fight persistently high inflation raised the recessionary risk.

A poll of analysts earlier this month found there is a 40% chance of a US recession over the next two years, with a 25% chance of that happening in the coming year.

Fitch Slashes Global Outlook

“The global macroeconomic outlook has deteriorated materially since end-2021,” said Fitch Ratings, which slashed this year’s global growth outlook to 2.9% in June from 3.5% in March.

“Stagflation, which is characterised by persistent high inflation, high unemployment and weak demand, has become the dominant risk theme since late 1Q22 and a plausible potential risk scenario,” it said in a report released this week.

A string of recent data globally showed policymakers are walking a tightrope as they try to defuse inflation pressures without tipping their economies into a steep downturn.

US retail sales unexpectedly fell in May and existing home sales tumbled to a two-year low, a sign high inflation and rising borrowing costs were starting to hurt demand.

Britain’s economy unexpectedly shrank in April, adding to fears of a sharp slowdown as companies complain of rising production costs. Its PMI also showed signs the economy was stalling as high inflation hit new orders and businesses reported levels of concern that normally signal a recession.

In Asia, South Korea’s exports for the first 10 days of June shrank almost 13% year-on-year, underscoring the heightening risk to the region’s export-driven economies.

While Chinese exporters enjoyed solid sales in May, helped by easing domestic Covid-19 curbs, many analysts expect a more challenging outlook for the world’s second-biggest economy due to the Ukraine war and rising raw material costs.

The au Jibun Bank flash Japan Manufacturing PMI slipped to 52.7 in June from 53.3 in May, marking the slowest expansion since February.

• Reuters with additional editing by Jim Pollard