2023-04-12 • Updated
Signs of a possible slowdown in the global economy have increased during the last two weeks. The pandemic continues hurting economic activity in China, the war in Ukraine is hitting the entire European economy, and the Federal Reserve's efforts to control inflation threaten to trigger a recession.
China's retail sales, the main measure of consumer activity, fell by 11.1% on an annual basis, compared to forecasts of 6.6%. Industrial production, which supported China's rapid economic recovery from the initial shock of COVID-19, fell by 2.9%.
In Europe, the European Commission expects the EU and Eurozone to expand by only 2.7% this year, well below the previous forecast of 4%. Inflation is likely to rise to more than 6% this year. So the ECB President Christine Lagarde signaled her support for a rate hike next July, paving the way for the Eurozone's first rate hike in more than ten years.
In the US, annual inflation is still at its highest level in 40 years, and there's a significant risk of a recession. This week alone, the former CEO of Goldman Sachs warned of "very, very high risks" of a recession. According to Wells Fargo, there's no doubt that a downturn is looming on the horizon. The former Fed Chairman warned that the US is poised to fall into stagflation, a slowing economy, and high unemployment accompanied by higher inflation. The odds of a recession are currently around 30%, according to the research by Moody's and a Wall Street Journal poll.
The main concern is that the Fed will raise rates too high too quickly in a short time, killing economic growth. Higher rates curb inflation by making it more expensive to borrow money, making it pricier for consumers to spend on goods and services, and for businesses to grow and hire workers.
If the Fed gets it wrong, a sharp rate hike could halt growth, causing a recession. With the Fed moving aggressively to tame inflation, there's no doubt that a contraction is looming, even if it doesn't develop into a recession.
The outlook is not entirely gloomy. Some economic indicators point that the recovery is still on the right track, and the US economy is still on solid ground.
1. Industrial production in the US rose for the fourth consecutive month in April, hitting a 15-year high.
2. US consumer spending, which accounts for two-thirds of economic activity, remains strong, with retail sales growing at a healthy pace in April.
3. The labor market remains strong, as the US added 428,000 jobs in April, above forecasts for the second month in a row. If this pace continues, the US will reach full employment capacity by July.
In the end, despite the growing fears of recession or a downtrend, conditions are still good. For example, we haven't seen mass layoffs yet, which is a sign of recession. Consumer spending, which accounts for about 70% of US economic activity, is still holding up. If there's a sudden slowdown in spending, it will immediately negatively impact. Corporate profits will fall, and employers will start laying off workers to protect their profits. As for the US dollar, the hints of the upcoming recession will be harmful to the currency, while good economic news from America will drive it up.
The upcoming August inflation data may send mixed signals. The 12-month headline inflation rate is expected to rise to 3.6%, causing concerns for the Biden administration. However, core inflation, which excludes food and energy prices, is projected to decrease to 4.3%, aligning with the Federal Reserve's goals. Past price trends influence both figures, so looking at recent data for a more accurate picture is crucial.
USDTRY keeps strengthening. The Turkish lira doesn't pay much attention to the Central Bank actions.
The odds of a final interest rate hike by the US Federal Reserve (Fed) this year have dropped after US job openings hit their lowest levels since early 2021. This has led to a correction in the US Dollar as traders reduced their bets on further rate hikes.
The past several weeks have been a real triumph for the bulls in the oil market. The Brent spot price grew by 8.5% during the last month.
Gold prices are rising for three consecutive days ahead of the Federal Reserve (Fed) interest rate decision, which is expected to remain unchanged due to declining inflation and a positive economic outlook. Investors are keen on the Fed's interest rate guidance, fearing a hawkish stance that could trigger market risk aversion.
Amid concerns of a Chinese economic slowdown, reports of declining investment often overlook China's efficient investment strategy in emerging sectors for long-term growth. China has taken measures to stabilize foreign and private sector investments, like reducing the reserve requirement ratio to boost investor confidence.
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