Recession or resilience? How the US, Europe and Asia stack up

About two and a half years after Covid recovered, the world economy is facing the prospect of a new recession. On the surface, the global economy is experiencing general difficulties, mainly inflation, which has increased as a result of the war on global energy prices, reducing real income while pushing up interest rates. capacity up.

Even so, the challenges facing the three main economic regions – the US, Europe and Asia – are very different, especially because the aforementioned headwinds are not nearly as global as ours. thought.

To appreciate the different risks and their probable timing, we should remind ourselves of the cyclical dynamics and structural context of each region. Compared to the US, the eurozone is subject to more severe economic hit in the near term, but fortunes could reverse in 2023 as US challenges are likely to persist. Meanwhile, Asia’s largest economies – Japan and China – are in the most favorable position in the short term as recession risks appear relatively low. Over the longer term, however, both new and old structural challenges in Asia are likely to make growth riskier than in the West.

European risks peak this year, US risks next

Although both the US and Europe face high recession risks – much higher than Asian economies – risks vary in degree and type. Yes, the energy shock is global but it is Europe where energy prices can cause recessions on their own. Although the US energy mix is ​​even more reliant on European natural gas, spot natural gas prices have increased more than 15 times in Europe since the start of 2021, making the increase significantly. four times more in the US than the modest level.

This disparate energy shock translates into a material macroeconomic headwind in the US but into a much more savage shock in Europe, affecting real income and spending power. It also erodes the industrial competitiveness that has been achieved in part because cheap energy is impractical for so long.

But Europe’s greater exposure to Russia’s geopolitical energy use is only one disadvantage – Eurozone economies are also less resilient than the US.

Like their American counterparts, European consumers today are in a relatively comfortable position in the face of a recession. On both sides of the Atlantic, households’ balance sheets are much stronger than they were before the pandemic due to a rapid increase in cash holdings – but households in the US accelerated more due to the stimulus. like more. Similarly, both regions enjoy strong labor markets that reflect factors that are unlikely to be destroyed by an energy shock – but here, the US labor market is particularly tight and workers US workers are seeing stronger wage increases.

Similarly, US companies show a higher degree of recovery. Both the US and Europe are seeing high margins, but operating margins are near three-decade highs in the US, while in Europe margins are higher in a decade. but not as strongly as before the 2008 global financial crisis. Each will be squeezed as input prices – both goods and increasingly labor – will be difficult to deliver as demand declines.

A reversal of fortunes next year?

Given Europe’s larger shock and weaker resilience, it looks like Europe’s risks are greater – but that’s narrowly focused on near-term recession risk. While by the end of 2022, the United States is in a position of clear favor, that could be reversed by the end of 2023.

In Europe, energy headwinds can be expected to peak this winter and then ease as energy demand declines seasonally and in the medium term Europe has more time to diversify. diversification of energy supplies, which will also require investments that generate GDP. Of course, that won’t be easy as energy prices are likely to stay high, leaving budgets tight and some industries weakly competitive.

In the US, the labor market continues to show significant strength – seemingly likely to insulate the economy from a clear recession in 2022 – but it is that strong labor market that increases the risk. There is a risk that even if inflation continues to fall into 2023, it will not fall far enough.

In contrast to Europe, where inflation is overwhelming in energy, US inflation is broader in nature. This broad-based inflation, especially if it is mainly driven by wages, will be unlikely to be phased out of the economy in 2023. This has prompted more aggressive monetary policy in the US which is expected to continue tightening. In contrast to Europe, US monetary policy is expected to tighten in a meaningfully tight stance, intentionally becoming a nagging headwind to economic growth. This suggests very slow growth next year, and while a recession is not inevitable, sustained policy tightening to combat broad-based inflation is a dangerous move that Europe has hitherto missed. no need to follow.

Therefore, if compared with each other, one can conclude that it is preferable to be the US at the end of this year, but Europe at the end of next year.

Asia’s cyclical risks look much better, but no their structure

Compared to the West, the risks facing Asia’s largest economies look pretty good. First, Japan and China have not yet experienced a European energy shock despite being significant energy importers. And because inflation remains modest, the need for monetary policy to create a sustained headwind does not apply.

It is true that global energy prices have pushed Japan’s inflation higher. But energy prices that push inflation beyond the 2% target will not end Japan’s two-decade structural struggle to achieve healthy price growth, nor lead to a shock. real income is too great. The composition of inflation does not support the idea that near-target inflation will continue. Services inflation remains deflationary and wage growth is hard to find. As a result, the Bank of Japan did not participate in the interest rate roadmap of Western central banks but still committed to zero interest rates despite the severely weakened currency.

So, even though Japan’s recession risk increases today have diminished relative to the West’s, it is still bogged down by the same structural problems that have challenged it for years: trend-following growth. very low and monetary policy constrained by a lower bound of zero – a combination that has contributed to the weakest real exchange rate since the early 1970s.

Japan’s structural landscape has turned into frequent recessions and that is likely to remain a reality for the Japanese economy. Since the late 1980s, Japan has spent about a third of the time with output below peak, something less common in the US With or without the cyclical risks threatening Western economies, The prospect of another Japanese recession is always high.

Similarly, China’s cyclical risks are modest compared with the West. Inflation is below the 3% inflation target and is less driven by an energy squeeze – part of the benefit of being a buyer of Russian oil, as Ural crude is already being sold at a high discount ( usually over $30 per barrel, recently closer to $20) since the war started in late February. There is no real income shock from inflation, nor is it necessary to raise interest rates to combat inflation.

Instead, China’s cyclical risks continue to be focused on its COVID policy. Lockdowns, the essential of a NO COVID strategy, unchanged year-on-year growth and negative quarter-quarter growth in the second quarter. And while China’s economy is expected to bounce back strongly, the risk of more shutdowns remains. China’s aggressive growth management in 2020 is the envy of the world, but today other economies are less affected by the virus.

In addition to cyclical risks, a number of structural forces are likely to lead to slower growth than has been experienced in the past, as China has noted by reducing growth target to 5.5% for 2022. The remarkable 6-8% growth in recent years is difficult to achieve both because of China’s larger economy and because the latest policy has several goals. will make growth more sustainable but also harder to find. These include (but are not limited to) rebalancing economic activity towards internal consumption, developing intrinsic resilience and developing strategic industries, and becoming less dependent on debt. real estate development.

Today, Asia’s cyclical risks look better than those of the West, but less long-term as structural challenges remain significant with Japan trapped in a zero-interest rate trap and China. is starting to shift towards slower growth. In contrast, the West’s structural outlook – while facing its own challenges – is arguably better than it was in previous years. Economies that are running near potential with tight labor markets can survive even a recession. These tight labor markets can still deliver real and widespread wage increases as well as supply spark to achieve better than expected yield in average time.

Think Globally, Analyze Locally

While acknowledging today’s sharp global recession risks is a valid starting point, the differences between the US, Europe and Asia – as well as the differences in timing – believe idea of ​​uniformity; The extent, nature and duration of these risks have different meanings.

To navigate these complex dynamics, operators and investors must analyze drivers and risks in the region and examine the interlinkages. The outlooks will still be too particular to allow for a global recession narrative.

Philipp Carlsson-Szlezak is the managing director and partner at BCG’s New York office and the company’s chief global economist.. Paul Swartz is a director and senior economist at the BCG Henderson Institute in New York.

Opinions expressed in commentary are solely those of their authors and do not necessarily reflect the opinions and beliefs of Luck.

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