Much has been said in recent weeks about the impact of the US default on the global economy. So they have diverted attention to this US political tug-of-war to the extent that the removal of the US default scenario probably gives the impression that the underlying risk has also disappeared. However, a potential recession appears to threaten both the planet’s largest economy and Europe’s largest economy, with what it could mean for the global economy. And in the background, of course, there is always the concern about the slowdown in China, which to some extent concerns the woes of the German economy.

The warnings were plentiful from economists of all stripes who have been sounding the alarm for months about the impact of successive interest rate hikes by the US Federal Reserve, the ECB and the Bank of England.

Central banks are persistently and to some extent continuing to fight inflation, as there are no clear signs of a recession yet. In the superpower, the figures have long been and remain labor market shortages, mass hiring, wage increases and sustainable consumption. In the euro area, data was released showing that the German economy is overcoming the difficulties caused by the recent energy crisis and is growing. But the picture is being dramatically turned on its head as the superpower’s economy appears to be slowing and Germany is already in recession.

In the first quarter of 2023, US GDP grew by just 1.1%, while the German economy contracted by 0.3%.

During the week, ratings agency Moody’s warned that the combination of high inflation and higher borrowing costs would lead to a recession in the US, German and UK economies.

In its G20 Economics Report, Moody’s highlights that the successive hikes in interest rates by central banks on both sides of the Atlantic are leading to “particularly weak growth in advanced economies, mild recession in the US, UK and Germany, and stagnation in France and Italy.” Indeed, in the first quarter of 2023, US GDP grew by just 1.1%, indicating a clear slowdown in growth compared to the 2.6% growth recorded in the last quarter of last year.

During the same period, the German economy, often thought to have escaped recession, shrank by 0.3%. This justified, therefore, economists and analysts who predicted developments, as its industrial production recorded the largest drop in the last 12 months. In short, the eurozone’s largest economy is typically in recession as it contracts for the second quarter in a row. This was preceded by a decline in German GDP by 0.5% in the last quarter of last year.

New rate hikes

So far, the Eurozone has managed to avoid a recession, but in the first quarter of the year it recorded growth of only 0.1%, well below market forecasts. The stagnation of its economy is a source of concern for the ECB, which, however, persists in the fight against inflation and constantly increases the cost of borrowing with the risk of a clear recession. Governor of the German Bundesbank and member of the Board of Directors. ECB’s Joachim Nagel reiterated his stance a few days ago that further interest rate hikes, even multiple increases, are needed, even if they send the eurozone economy into recession.

Andreas Dombret, a former member of the board of directors, was quick to agree. Bundesbank, which stressed that “we are in an extremely difficult phase because inflation is proving to be resilient and showing no signs of easing, as we all hoped.” And he added, “this is why the ECB needs to remain open to a possible new interest rate hike.” And, of course, he acknowledged that “there is no doubt that such an attitude will have negative consequences for the economy, but if inflation is left unchecked, the negative consequences will be much worse, therefore, for the sake of its credibility, the ECB must remain firmly on the same path.”

The latest data show that inflationary pressures in the euro area eased to 6.1% in May, and many economists predicted that the ECB, as well as the Federal Reserve, would break this cycle of rising borrowing costs. But now, it seems that almost no one believes in this anymore, since monetary policy makers do not show such sentiments. At least as far as the ECB is concerned, its intentions are clear and stated. Commenting on recent developments on the price front, ECB President Christine Lagarde expressed caution as to whether inflation has peaked and is now declining. He even added that the bank will continue to further increase the interest rate.

However, the ECB has recently capped interest rate hikes to 25 basis points from 50 basis points. what he got off to a good start with. However, he raised interest rates in the eurozone to 3.25%, which they were last in November 2008 at the beginning of the global financial crisis. Thus, a new move by the ECB is expected at its meeting on 15 June.

Domino effects from China’s growth brake

Moody’s is not alone in predicting a recession in Germany for the whole year. This was preceded by the IMF, which estimates that the German economy will contract by 0.1% this year. And worries about the steam engine of the European economy are intensifying as the sharp drop in German exports to China has been critical to its industry. Clearly, the world’s second-largest economy is itself in decline after a satisfying 4.5% growth in the first quarter of the year. All indications are that the Chinese economy already tends to lose the momentum it gained after restarting at the end of last year with the lifting of measures against the spread of the pandemic.

The situation with the Chinese economy is worsening, as the latest data released this week showed that the manufacturing sector contracted for the second time in several months. As economists emphasize, the main aggravating factor for China is the decline in external demand from both the United States and other developed economies in general, which led to a significant slowdown in its exports: in April it increased by only 8.5%, while in March registered an increase of 14.8%. China, however, is Germany’s number one trading partner. The slowdown in the Chinese economy leads to a reduction in imports from Germany and, in turn, hurts the German economy, which does not hope to find an easy way out of the recession and a quick recovery.

However, a protracted slowdown in the German economy is likely to create problems for the rest of the eurozone, which narrowly avoided recession at the beginning of the year. There are already signs of a slowdown in France, which has rebounded strongly from the pandemic and recorded a 2.6% growth over the past year. In the first quarter, French GDP grew by only 0.2%, and it is expected that this year the growth of the French economy will not exceed 0.7%. Perhaps the only hopeful sign for the largest economies in the eurozone is a partial easing of inflationary pressures in France, Germany, Spain and Italy. After all, inflation is slowing down in both the UK and the US, but remains prohibitively high compared to the 2% target of central banks.

Battle

Despite the already noticeable recession in Germany and the impact of successive interest rate hikes on the economy, the ECB president stressed a few days ago that “inflation has been at an excessively high level for a long time and the ECB is fighting to stop it.” which has not yet expired, but will only expire when there is sufficient evidence that it is moving towards the 2% target.”

10.1 million jobs are vacant in corporate America.

Grade

“We estimate that the increase in US hiring will prove to be temporary as other indicators point to a slowdown in the labor market,” said Paul Stewart, an economist at Bloomberg, who does not take into account the slowdown in the US economy.

4.5% was China’s rise in the first quarter of the year.

Problems

“The economic recovery faces challenges,” Xiwei Zhang, economist and president of Pinpoint Asset Management, commented this week, noting that in China, “domestic demand has weakened recently in part due to the second wave of the coronavirus and the Chinese crisis.” real estate market.”