Insight & Analysis

Recession or soft landing? The signals suggesting a sharp pullback ahead

Published: Jun 2023

As central banks deliver their latest decisions on interest rates the risk of a recession and stagflation looks more likely.

“I think we are now at a point where it is arguably more pertinent to say what signals are not showing a recession,” says Chris King, seasoned corporate treasurer and co-founder of risk management specialist Dukes & King speaking to Treasury Today. “Although we clearly hope there could be a soft landing, the continued data themes, most of which have happened in the last three to six months and have a six-12 month time lag, suggest a relatively sharp pullback.”

The indicators he is most concerned about include the depth and now duration of the inverted yield curve which inhibits the issuance of credit due to banks’ lending models. Elsewhere, tightening of credit and credit restrictions have come through in Q1 in a major way. King also flags the “major slowing” of China’s economy, visible in a sharp pullback in prices in most commodities. Although he notes commodity prices are poised “ready for a recession” rather than actually in recession, they act as a good leading indicator of demand ahead.

All themes are echoed in Euromonitor International’s latest Global Risk Index which argues the global economy is now more at risk of stagflation than any other risk.

Its latest analysis forecasts a 30% likelihood of global stagflation, predicting a -5.5% hit on global real GDP if so. A primary cause of the heightened risk, says Lan Ha, Head of Practice, Economies at Euromonitor International, is the war in Ukraine.

“The primary risk driving the global stagflation scenario in 2023 is further disruption to global energy and food supply in the context of the war in Ukraine. This would ignite a resurgence of global inflation and increase the likelihood of more persistent price pressures in the global economy,” she says.

All the while increasingly restrictive monetary supply in the world’s largest economies is adding to recessionary pressure. Brice Lecoustey, Consulting Partner, EY Luxembourg questions if ongoing rate hikes are the right tool to tackle the underlying cause of inflation given its source in energy and food prices.

“Economic conditions are particularly challenging,” he says. “Inflation is mostly in energy and food prices and is not a consequence of economies overheating. Rising interest rates will reduce the ability of businesses to invest in agriculture and new energy, in a vicious circle that feeds this type of inflation. Overall, it is still not clear if central bank interest rate policies will work when the underlying factors that are creating inflation are linked to topics that are more complicated.”

At a consumer level, King notices that the cumulative factors of the impact of inflation and high borrowing costs are now starting to come through. “Each month of elevated energy, food and housing prices impacts demand. We have only just started to see the impact in reduced volumes now. Consumer demand has recently fallen sharply, with demand for construction and consumer products now exhibiting around 25% volume reduction with expectations to fall further through into 2024,” he says.

Moreover, in the US particularly, the surplus cash savings accumulated through the pandemic are now being eroded at quite a fast rate, concerning since this store of money has helped prop up the economy over the last few years.

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