The inflation phenomenon continues to weaken recently (at 2.5% in June in the Eurozone) although as has been emphasized several times this does not mean that prices are falling. Accuracy remains a “noose” for incomes, a condition that can lead to a parallel weakening of economic activity and investment and ultimately to recession. The odds are higher, at least on today’s terms, for the US as the European economy recovers.
To be fair, the data shows that the Eurozone has recovered from a technical recession (two consecutive quarters of GDP contraction of 0.1% in the second half of 2023) after the good performance of the “big four” economies, namely Germany , of France, Spain and Italy, in the first quarter of 2024. This was helped by lower energy prices, weaker inflation, higher real wages and the prospect of an interest rate cut by the ECB, which reality in early June. Thus, economic activity recovered, but again there is a need for continuity.
The factors supporting deflationary pressures are the following:
- consumption may appear resilient, but in no way can it be compared to the consumption frenzy that prevailed during the pandemic, when rising energy prices have reduced household disposable income.
- the increased cost of money, due to the higher interest rates of the last decades, has negatively affected, as expected, the demand for the so-called durable goods, that is, the more expensive and “heavier” goods, such as a car or a house, the which are often bought with a loan.
- conditions in supply chains are normalizing, after the serious problems that existed during the pandemic.
An ally in the weakening of inflation is the better picture in raw material prices recently, which is mainly attributed to the weak economic conditions in China. Trust Economics estimates that this trend will continue in the coming years, as the economy gradually balances out from the real estate-led growth of the past years.
But how likely is it that we will see a recession in Europe and the US?
In America, it is estimated that almost half of the economy is already in recession. Although this is an unproven term, there are sectors of the economy where activity is shrinking and can affect the entire economy if the situation continues. According to Trust Economics, the US economy may slip into recession either later in 2024 or 2025. This estimate is based on the fact that the labor market is weakening, which may accelerate in the coming months, being a big “burden” for the development.
Trust Economics estimates that in the recession scenario, the stock markets will risk a fall of up to 30%, dragging global markets into losses.
The reality shows that US GDP grew by 1.4% in the first quarter and there are significant doubts about the performance of the following quarters.
It is characteristic that the forecast of the Atlanta Fed spoke of a growth of 3.9% in the second quarter and finally it is estimated that the GDP grew by only 1.5% in the April-June period.
Also, the Fed sees inflation as stubborn and is considering keeping interest rates on hold even longer, dealing a blow to the economy. US consumer spending is falling and investment is slowing due to interest rates.
Therefore, the smooth landing of the economy, i.e. the reduction of inflation towards 2% without triggering a recession, is not guaranteed. It is noted that consumption is the engine of the American economy, as it corresponds to 70% of the activity. Based on some analyses, the probability of a recession in the US is 51.82% for the next year.
Another unfavorable scenario is that there is no recession but that the US and Eurozone economies are locked into a long period of stagflation, in which inflation remains above the 2% target and growth falters.
The recession that has been expected for two years may be delayed but ultimately proved to be inevitable, at a time when political and geopolitical upheavals are a frequent phenomenon.
