Gloom or doom for the global economy? Vanguard gives 65% chance of recession

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The global economy, led by the western world, looks pretty broken, doesn’t it? Vanguard isn’t worried. They don’t think there will be a recession this year. Next year, however, the chances are greater.

Why?

The US has not had such high inflation since the 1970s. Europe is collapsing and must act quickly to reverse unreasonable energy costs on the road to colder weather months.

Certainly, much of this is due to the war in Ukraine. But not everything. Mass incentives and money pressure, coupled with policies aimed at punishing any company that makes anything from fossil fuels, have only made matters worse.

But despite the fact that Europe is “barely” as Goldman Sachs put it last week, other countries are in similar trouble. And they are not there to punish farmers and oil companies, nor do they have sanctions against Russia.

Inflation in Japan is at its highest level in 8 years. Brazil and India raise interest rates. The US inverted yield curve deteriorated on Friday, pointing to a recession beyond the technical recession the economy found itself in the second quarter.

Is it just bleak for the global economy, or bleak? and demise?

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recession? Which recession?

Look to the Biden White House to celebrate again when third quarter economic data comes out. If Barclays Capital is right, third quarter GDP rose 0.3% from the previous quarter, meaning the technical recession of consecutive quarterly declines has ended. If so, the markets should take this as a sign that the economy is growing. And with inflation accelerating, the Fed won’t stop raising interest rates.

Investors need to get this pause thing out of their heads. The Fed, the ECB and the BoE are not letting inflation stay at 8% while interest rates are around 2%. (In Europe they are less than 2%.) This misses the point of having a central bank whose mandate is to control inflation.

Vanguard, one of the largest fund managers in the world, expects the Fed to likely stay ahead of inflation trends and be the next to hit 75 basis points. A 100-point raise is not off the table, they said. They expect the borrowing rate to end at 3.75% this year and 4.25% next year.

Since no one is talking about a recession, the Fed is going to raise interest rates. And Vanguard doesn’t think that will lead to a recession either.

“A recession seems unlikely this year given the strength of the labor market,” they wrote in a note last week. “Our expectations for a recession are now the same as before, with a 25% chance of a recession in 2022 and a 65% chance in 2023.”

Last week an American Express
AXP
research showed that small businesses nearly doubled sales year over year, but economic challenges kept profits stable. About 75% of those surveyed said their business is affected by inflation.

from the last one Small Business Recovery Report, 37% said they plan to increase prices, 22% seek better deals with suppliers, and 22% are cutting back on lower-margin products and services from their offerings.

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