Will there be a recession or not? Will it hit Europe or the US? A question to which analysts and observers try to give answers. Meanwhile, a climate of greater optimism is spreading.
Can a recession be avoided? The question is spreading in various European and American contexts, in a growing awareness that perhaps, despite the uncertain scenario of the war and the unresolved energy crisis, the worst can be avoided.
The last voice in this chorus more open to positive forecasts came from the European Commissioner for the Economy, Paolo Gentiloni. Europe has an opportunity to avoid a deep and prolonged recession even if the economic situation remains uncertain, he said.
But is it really so? And in the US, with the Fed still ready to raise rates, albeit less aggressively?
What some experts suggest about it and why there are opportunities for the world to avoid recession.
Is the recession coming? Maybe not
Goldman Sachs economists are expecting the Eurozone economy to contract in the fourth quarter, but are now forecasting a slight increase in the first quarter. For 2023 as a whole, the team expects GDP to grow by 0.6%, versus a previous forecast of a 0.1% decline.
There are three key reasons supporting this more optimistic forecast. One is that the industrial sector has been surprisingly resilient. Another is that natural gas prices have continued to fall sharply. And finally, China is reopening earlier than expected.
Is Europe safe from recession? Not entirely, but in some ways the clouds seem less black. Admittedly, Germany and Italy are still expected to be on the brink of recession, due to their former dependence on Russian gas imports. But France and Spain have more diverse energy sources and are also service-intensive economies.
Not only that, European Central Bank Governing Council member Mario Centeno said that the euro area economy is doing better than many expected in the face of record inflation and the energy crisis that erupted after that Russia attacked Ukraine.
“The economy surprised us quarter after quarter”, he said. “The fourth quarter in Europe will most likely still be positive. Maybe we will be surprised even in the first half of the year”.
The biggest sign of outperformance came last week when Germany defied forecasts for output contraction in the last three months of 2022. Europe’s largest economy could now avoid a recession altogether, offering hope to the 20-nation euro region.
Commissioner Gentiloni echoed him:
“We have managed to reduce energy dependency, energy prices have dropped significantly and inflation peaked at the end of last year in Europe, so there is a chance to avoid a deep recession and perhaps entering a more limited and superficial contraction”
Avoiding a deep recession depends on Europe’s policies, not just global trends, he said, adding that he was optimistic that the lockdown could limit the consequences of the energy crisis.
Eurogroup President Paschal Donohoe had previously argued that the euro area is in a very resilient position and is likely to avoid recession this year with very low growth.
In summary: a China that reopens and pushes to accelerate growth, the falling gas price and the effort to diversify energy continues can save Europe from the worst case scenario.
Will the Fed save the US from recession?
On the United States front, the so-called soft landing could make headway, ie the Fed strategy that fights inflation with rising rates, but uses prudence and avoids a recession.
There are some signs of optimism in this sense and Federico Rampini listed them in his analysis, in the Corriere della Sera. The point is that the Federal Reserve could start to moderate the use of rate hikes, supported by at least two factors:
“For six consecutive months, US inflation has continued to fall: the December increase in the consumer price index was 6.5% year-on-year, compared to a peak of 9% reached last June... The US economy continues to generate new jobs, hiring net of layoffs was 223,000 in December. This is a positive figure, which continues to bring down the unemployment rate (currently at 3.5% in the US) and at the same time the pace of new hires is slowing down (in November it was +256,000)."
In short: there is a strong economy, but not overheated and the wage-price spiral can be avoided.
The scenarios remain uncertain. Perhaps, according to some analysts, this uncertainty will not lead to the recession in such a clear and brutal way. Several adverse factors, however, are not lacking: from the unknown war to the real trend of the Chinese economy, up to the perception of business and consumer confidence. The recession can be avoided, in the US as in Europe, but positive conditions must materialize and remain.
Original article published on Money.it Italy 2023-01-17 15:20:18. Original title: Perché è ancora possibile evitare una recessione
