Spillover fears
Will a US recession impact Jamaica? If yes, how badly?

THE recession bells are being sounded in the United States, with everyone — from economists to CEOs, Wall Street and Main Street — in agreement that the Federal Reserve action to contain runaway inflation could send the world’s largest economy into a tailspin over the next few months.

The most widely accepted definition of a recession is two-consecutive quarters of declining gross domestic product (GDP). According to a forecast by The Conference Board, US real GDP growth will slow to 1.5 per cent in the first quarter of 2022, down sharply from 6.9 per cent growth in the last quarter of 2021. The White House is confident of strong GDP growth in 2022 despite inflation risks, and the International Monetary Fund shares that optimism with an estimate of 3.7 per cent GDP growth this year for the US.

But those forecasts have not calmed fears.

US Federal Reserve Board Chair Jerome Powell. (Photo: AP)

On Wall Street, more than half of investment and economic professionals think the Fed’s attempt to combat inflation by raising interest rates and running off the balance sheet will eventually cause a recession.

Fed Chair Jerome Powell indicated last Wednesday his belief that a “soft” or “soft-ish” landing can be achieved without the most hawkish central bank policy decisions.

But on Main Street, eight in 10 small business owners are convinced the US economy will enter a recession this year, according to the latest CNBC|SurveyMonkey Small Business Survey.

This comes after Deutsche Bank, a German-based international financial services provider, raised eyebrows last month by becoming the first major bank to forecast a mild recession in the US before updating that forecast to warn about a deeper downturn that could be triggered by the Federal Reserve’s quest to knock down stubbornly high inflation.

“We will get a major recession,” Deutsche Bank economists wrote in a report to clients in late April.

The problem, according to the bank, is that, while inflation may be peaking, it will take a “long time” before it gets back down to the Fed’s goal of 2 per cent. The suggestion is that the central bank will raise interest rates so aggressively that it hurts the economy.

“We regard it...as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, ‘Why the coming recession will be worse than expected’, according to a CNN report.

Then last Sunday, Goldman Sachs Senior Chairman Lloyd Blankfein, in an interview on CBS’s Face the Nation programme, urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk”.

“If I were running a big company, I would be very prepared for it,” Blankfein told the US network. “If I was a consumer, I’d be prepared for it.”

Blankfein’s comments were broadcast the same day as the firm’s economists cut their US growth forecast for this year and next to reflect the recent shake-out in financial markets.

Economists at Goldman now expect US GDP to expand 2.4 per cent this year, down from 2.6 per cent. It reduced its 2023 estimate to 1.6 per cent from 2.2 per cent.

The report called this a “necessary growth slowdown” to help temper wage growth and reduce inflation back down toward the Fed’s 2 per cent target. While the slowdown will push up unemployment, Goldman was optimistic a sharp rise in joblessness can be avoided.

The pronouncements come as the familiar precursors of a recession are being seen in financial markets: an inverted yield curve and rising interest rates on the back of high inflation (8.5 per cent in March), with COVID-19 uncertainty and disruptions caused by Russia’s invasion of Ukraine thrown in.

According to the World Economic Forum, in a report dated May 4, 2022, the yield curve inverted on March 29 for the first time since 2019. That happens when short-term Treasury bills attract higher interest rates than longer-term treasuries — a sign that investors are losing confidence in the economy. Meanwhile, Powell brought down the other shoe on speculation of higher doses of rate increases when he signalled a 50-point increase in May (earlier increases have typically been in 25-point bursts). He also wanted to move “a little more quickly” with shrinking the Fed’s asset portfolio in an effort to tame inflation.

So what is it? Is a recession on the cards in the US? How will it impact Jamaica if the forecasts are realised? What can you do as an individual now to mitigate the impact of such a recession were it to happen?

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