Recession fears in the United States spread to Asia and Europe

by Jonathan Cable and Leika Kihara

LONDON/TOKYO (Reuters) – Growth in industrial activity is slowing in both Asia and Europe due to supply difficulties from the impact of the COVID-19 epidemic in China and the invasion of Ukraine by Russia, at a time when the risk of recession in the United States is becoming clearer against a backdrop of rising interest rates.

Demand for manufactured goods in the euro zone suffered its biggest drop in June since May 2020, when the pandemic peaked, the first results of the S&P Global monthly survey of purchasing managers show: the index “Flash” manufacturing PMI fell to 52.0.

“June PMI surveys in the euro zone show a further slowdown in the services sector while production in the manufacturing sector clearly seems to be falling,” comments Jack Allen-Reynolds of Capital Economics.

“With price indices remaining extremely high, the Eurozone appears to have entered a period of stagflation.”

The probability of a recession in the euro area within a year is around a third, estimate economists polled by Reuters in recent days, who also expect a further acceleration in inflation, already at a level record in May at 8.1% over one year.

On Wednesday, Jerome Powell, the chairman of the US Federal Reserve, explained during a Senate hearing that the central bank was not seeking to trigger a recession in the United States but that it was determined to regain control of prices, even if that meant encouraging a decline in activity.

He thus acknowledged that a recession was “certainly a possibility”.

Inflation in the United States remains more than three times higher than the 2% target set by the Fed, which should lead the latter to another hike of three quarters of a point in its main interest rate this month. next, according to another Reuters survey of economists.

BETWEEN STAGFLATION AND RECESSION

Several major banks and investment firms are now predicting a US recession as early as this year or at least earlier than predicted a few weeks ago.

PIMCO, one of the main bond investors in the world, warned on Wednesday that the tightening of monetary policies by the major central banks was fueling the risk of recession as well as that of “financial accidents”.

Fitch Ratings lowered its global growth forecast for this year to 2.9%, 0.6 points lower than expected in March.

“Stagflation, which is characterized by persistently high inflation, high unemployment and weak demand, has become the dominant risk since the end of the first quarter of 2022 and a plausible potential risk scenario”, adds the rating agency in a statement. study published this week.

Several US economic indicators have recently confirmed this scenario, whether it is the unexpected drop in retail sales or the slowdown in home resales, which have fallen to their lowest level in two years, a sign that inflation and the rise in interest rates interest rates are undermining demand for real estate.

In Great Britain, after the announcement of an unexpected contraction in economic activity in April, the “flash” PMIs published on Thursday show that inflation is affecting new orders in industry and that the concern expressed by business leaders has reached a level that usually foreshadows a recession.

In Asia, South Korean exports fell nearly 13% in the first ten days of June compared to the corresponding period last year and the Japanese “flash” manufacturing PMI, at 52.7, reflects growth in activity at its lowest since February.

(Report Jonathan Cable and Leika Kihara, French version Marc Angrand)

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