A new report from Fitch Ratings predicts that the U.S. economy will enter a mild recession by the middle of 2023. It attributes this to the lagged effects of aggressive Fed tightening, high inflation, and an impact on real wages. It also says that the global economy will slow sharply in the second quarter.
The global economy slows sharply in the second quarter
In the second quarter of 2023, the global economy will slow down by 1.2 percentage points. The Russian invasion of Ukraine and the COVID-19 pandemic will dampen global growth. Rising commodity prices will also hinder growth, as will tighter monetary policy.
Despite the slowdown, the global economy is expected to recover from the recent COVID-19 pandemic and may avoid a global recession next year. This weak growth is likely to lead to stagflation, which is especially harmful to low and middle-income economies. In 2023, global GDP growth is expected to slow to 2.1% and recover to 2.6% in 2024-29. In the meantime, consumer spending will be weak due to higher prices and financial stress.
Imports from the CIS region dropped 21.7% in the second quarter of 2022, most likely due to the Russian Federation's exclusion from the SWIFT payments system. In addition, higher commodity prices inflated export revenues but allowed resource-rich regions to import more. Meanwhile, import growth in Europe and North America was stronger than expected, while import growth in Asia was less than 1% year-on-year.
Wall Street Journal survey predicts recession in the U.S. in 2023
A recent Wall Street Journal survey indicates that half of the economists believe that the United States will not see a full economic recovery until 2023. The findings come at a time when the labor market is already struggling with slow hiring prospects. A recession would not be good news for any employer.
The survey predicts that the US will enter a recession next year, which is the third consecutive year that the economy will contract. The probability of the US economy falling into recession within the next 12 months has increased to 63%, up from 49% in the July survey. That is the first time that the survey has risen above 50% since July 2020. The survey shows that economists are pessimistic about the economy, with many expecting it to contract in the first two quarters of 2023.
The survey also shows that 63% of CEOs predict a U.S. recession within the next year, but that the probability has not risen above 50 percent since July 2020. The majority of CEOs believe that the next year will bring a recession, but only a third of them think that it will be a mild or short recession. In addition, 51 percent of CEOs plan to lay off workers within the next six months.
Impact of rising interest rates on purchasing power
Increasing interest rates is a traditional tool to contain inflation. However, it reduces the purchasing power of households. This is a key issue as inflation is expected to reach 5 percent in 2023. Moreover, concurrent hikes by central banks could trigger a series of financial crises in developing and emerging economies.
While the UK economy will continue to suffer from cost-of-living pressures, government measures will offset the impact. A cap on household energy bills will help keep inflation below 11% this autumn, compared to 14%-15% before the cap was introduced. In addition, cuts in National Insurance Contributions will boost household resources. Although the overall impact of rising interest rates will be mild, rising borrowing costs will be a major challenge.
The study uses previous recessions to provide a framework for the future. It presents three scenarios for the next few years, from 2022 to 2023. One of these scenarios focuses on rising interest rates in a global recession. The study also highlights the unusual circumstances under which central banks struggle to combat inflation. For example, the Ukraine war has impacted supply chains, and China's zero COVID-19 policy will remain in place through 2023. These issues will also make it difficult for the global economy to grow.
Signs of a recession in Europe
There are several warning signs that Europe may be entering a recession next year. Germany is the most powerful economy in Europe, but the country is already grappling with rising energy prices and the fallout from Russia's invasion of Ukraine. Meanwhile, the rest of the Eurozone is experiencing modest growth. Inflation is predicted to average 6.2% next year, higher than the 2% target set by the European Central Bank.
Despite the bleak outlook, the European economy is still expected to grow in the second half of 2022 and the first half of 2023. The European Union's GDP will probably expand at a modest pace, but headwinds will continue to be felt, particularly in the energy sector. The Conference Board predicts that Euro Area real GDP growth will expand by 2.7 percent in 2022 and 1.2 percent in 2023. A tight labor market is another factor that may trigger labor productivity gains in 2023.
Impact of inflation on purchasing power in the U.S.
Inflation can weaken the purchasing power of your currency, which affects how much you can buy and spend. It is measured by the purchasing power parity or the exchange rate at which a basket of goods in one currency can be purchased in another. When the purchasing power of a dollar decreases, it increases the cost of goods imported into the U.S.
Inflation is a problem that affects every aspect of the economy. It erodes the purchasing power of money and decreases wages. It is a worldwide problem that is increasingly important to address.