Not long ago, it seemed like recessions could hit the US, at least once a decade. But just two years after the end of the closures imposed due to the health ban to curb the spread of Covid-19, the wheels of the economy are “turning”, and it seems that the country will soon be through a difficult period go, according to a report published by the newspaper “The Economist”.
The report pointed out that the memory of what has happened in the world economy over the past two decades is dominated by two downward trends, the first being the “heart attack” between 2007 and 2009 and the collapse caused by the 2020 pandemic .
Compared to the situation in these two cases, however, it appears that the coming US recession may be “mild” and “slight”, but “The Economist” suggests that the “fragility” experienced by the global economy, asset markets and US becoming political can have “repulsive and unintended consequences”.
The paper stressed that “there will be no escape for the US economy from what is to come, given the rise in food and fuel prices. Last April, consumer prices rose by 8.3 percent compared to the previous year, while annual inflation rose to 6.2 percent.
At the same time, jobs are available at a rate of two jobs for every unemployed person, the highest level since the 1950s, according to data last March, and the increase in salaries has reached about 5.5 percent, which is the highest percentage ever, according to ” Goldman Sachs ”statistics. An increase that companies will not be able to keep up with unless they increase their prices.
The Federal Reserve, or the US Federal Reserve, hopes to alleviate the situation after raising interest rates by 2.5 percent by the end of 2022, in a move that hopes to reach an inflation rate of 2 percent, without a sharp collapse in the economy.
But historical evidence suggests that changes to reduce inflation are leading to a “shrinking” of the economy, according to the report, which confirmed that interest rates have risen in the same way since 1955 as they have seen this year, that is, during seven economic cycles, and in six of them came the recession.She noted that the only exception to the previous examples was in the mid-1990s, when the inflation rate was high and the labor market was balanced.
Why can the next depression be “shallow”?
The report indicates that with the onset of the next recession it may be “relatively shallow”, explaining that the crisis of 2007 and 2009 froze the financial system and in 2020 the activities of the financial sector stopped completely, and in both cases GDP experienced the largest decline since World War II.
But this time may be different, as the report puts it, America seems “resilient” in some respects, as consumers are pumping their money they brought out of economic packages during the pandemic period, and companies have enjoyed excellent profits, and although real estate prices rise, it It does not threaten to bring the country’s banks to a fall, as happened in the early 2000s.
The Federal Reserve also does not face the dilemma of the 1980s, in which inflation remained stable at 5% for about six and a half years and was forced to raise interest rates by almost 20%, causing unemployment has reached 11. %, while inflation has risen by a small percentage today above The target set for him for this year, and thus his “cleaning”, according to the newspaper, will facilitate.
The newspaper believes the problem is that the recession, albeit moderate, will expose major weaknesses, especially commodity prices in most parts of the world.The European Union is a major blow to the energy sector as it reduces its dependence on Russian oil, and the incomes of people around the world are collapsing.
Thus, any US recession will shock the fragile parts of the world economy by reducing the demand for exports, and the tightening of the Fed’s policy and the accompanying strengthening of the US dollar which has already become the highest selling of restrictions in emerging markets since 1994, while pointing out the International Monetary Fund.He indicated that about 60 percent of poor countries are suffering from debt crisis, or are on the verge of debt crisis.
Another weak point is represented by the US markets, where “Wall Street” has recorded a 15 percent decline since the beginning of 2022, and in a way that can be compared to the decline in 1991 amid a slight recession that year.
And the financial system based on loans, whose influence has increased since the crisis of 2007 and 2009, according to the report was not subject to an audited experience, as it includes financing funds that act as banks, and according to “The Economist” as If something goes wrong, it will be difficult for the Federal Reserve to get out. Wall Street “is out of its crisis again, because at the same time everyone will be expected to stick to high interest rates and job losses.
The biased tensions prevailing in US politics are another “fragile” point, as the newspaper has suggested that the recession will strike at the end of 2024, coinciding with the presidential election, and if the economy continues to shrink, “the race for the White House in 2024 will be fiercer than it was. ” expect.
The report believes that policies could change the administration’s response to the recession, and it is possible that the Federal Reserve will be led into a “political battle”, and voters can expect the states to support economically, but the Republicans, who likely to win the midterm elections in November will not take the initiative.Pay to save Democratic President Joe Biden.
The report stated that if the US economy shrinks in the next year or two, it could even change the country’s direction in the long run, pointing out that the best response to an economic downturn in which inflation has remained high is growth – supporting reforms, as e.g. as lowering tariffs and increasing competition.
“Alternatively, the recession could fuel populism and protectionism and even restore Donald Trump to the presidency. Three of the last four recessions coincided with or shortly before presidential elections. And each time the party loses power in the White House.”