FE Today Logo

US recession fears darken outlook for global growth

June 24, 2022 00:00:00

LONDON/TOKYO, June 23 (Reuters): Manufacturing growth is slowing from Asia to Europe as China's COVID-19 curbs and Russia's invasion of Ukraine disrupt supply chains, while the growing risk of a recession in the United States poses a new threat to the global economy.

High prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 when the coronavirus pandemic was taking hold, with S&P Global's headline factory Purchasing Managers' Index (PMI) falling to a near two-year low of 52.0 from 54.6.

A Reuters poll had predicted a more modest drop to 53.9 and the index nudged closer to the 50 mark separating growth from contraction.

"June's euro zone PMI surveys showed a further slowdown in the services sector, while output in the manufacturing sector now seems to be falling outright," said Jack Allen-Reynolds at Capital Economics.

"With the price indices remaining extremely strong, the euro zone appears to have entered a period of stagflation."

There is a roughly one in three chance of a recession in the bloc within 12 months, economists in a Reuters poll published earlier on Thursday predicted. They also said inflation - which hit a record high of high of 8.1 per cent last month - was yet to peak.

Jerome Powell, chair of the Federal Reserve, said on Wednesday the central bank was not trying to engineer a recession in the United States to stop inflation but was fully committed to bringing prices under control even if doing so risks an economic downturn.

He acknowledged a recession was "certainly a possibility".

Inflation continues to run at least three times higher than the Fed's targeted level of 2 per cent and it is expected to deliver another 75 basis point interest rate hike next month, according to economists polled by Reuters.

Despite Powell's comments a few primary dealers have either started predicting a recession as early as this year or have brought forward their recession calls.

US investment firm PIMCO warned on Wednesday that central banks tightening monetary policy to fight persistently high inflation raised the recessionary risk.

There is a 40 per cent chance of a US recession over the next two years, with a 25 per cent chance of that happening in the coming year, a Reuters poll found earlier this month.

"The global macroeconomic outlook has deteriorated materially since end-2021," said Fitch Ratings, which slashed this year's global growth outlook to 2.9 per cent in June from 3.5 per cent in March.

"Stagflation, which is characterised by persistent high inflation, high unemployment and weak demand, has become the dominant risk theme since late 1Q22 and a plausible potential risk scenario," it said in a report released this week.

Share if you like