What is a recession and how close are we to it?



The debate over whether the U.S. economy will fall into recession over the next two years – and if so, when – has been the subject of heated debate among economists, policymakers, investors and executives. business for much of 2022. Inflation has accelerated to levels not seen since the early 1980s, leading the Federal Reserve to take aggressive action to combat it. Concerns grew that the global economy would also slide into recession as central banks around the world rapidly raised interest rates.

1. What is a recession?

A common rule of thumb is that it’s when the government’s hallmark measure of economic activity, gross domestic product, contracts for two consecutive quarters. But the Business Cycle Dating Committee of the National Bureau of Economic Research, the group of academics whose determination is considered official in the United States, defines a recession differently: a “significant decline in economic activity that spreads across economy as a whole and lasting more than a few months.” The group takes into account factors such as employment, inflation-adjusted spending and industrial production. The decline must meet three criteria: depth, distribution and duration.

2. What do the numbers show?

Adjusted for inflation, US GDP, or the total value of all goods and services produced in the economy, posted consecutive declines in the first half of the year. Another measure of growth, gross domestic income – which calculates all income generated from the production of these goods and services, including compensation and business profits – was positive in both quarters, but barely d April to June. Theoretically, GDP and GDI should be roughly equal, so the divergence has spurred debate over how much the economy has weakened in the first half of the year. The Business Cycle Dating Committee looks at the average of the two measures, which was slightly negative in both quarters.

3. How close is the United States to a recession?

It was not clear at the start of the fourth quarter. The Fed quickly raised interest rates to temper demand and rein in the worst inflation in decades, stoking fears of a slowdown. But economic data released through mid-October still suggests generally resilient consumer spending and a strong labor market. Some economists have said the United States could avoid a recession in the coming quarters. Others disagreed. Bloomberg Economics expected the United States to enter a recession in the second half of next year. Economists at Deutsche Bank AG, one of the first major banks to predict a recession, expected it to begin in mid-2023. Nomura Holdings Inc. was expecting one earlier, starting later this year.

4. What about the rest of the world?

The global economy has also faced high inflation and aggressive central bank action to rein it in. In Europe, Russia’s invasion of Ukraine and the resulting energy crisis heightened fears of an impending downturn. Russia has gradually reduced natural gas flows to Europe’s largest economies, driving up energy prices and squeezing household balance sheets. In August, Bloomberg Economics predicted that the euro zone would enter a recession in the last quarter of 2022. The following month, Germany’s leading research institutes said the national economy would likely contract by 0.4% in 2023. The Bank of England warned in August that a recession was likely to start in the fourth quarter of 2022. The situation in the UK became complicated when the government of Prime Minister Liz Truss offered massive and unfunded tax cuts, then went is reversed due to the ensuing market chaos, prompting Truss to pull out. As for the Chinese economy, it has slowed down sharply, put to the test by a real estate crisis and the measures in progress to fight against Covid-19.

5. How bad will a recession be?

For the most part, economists said any impending recession in the United States would likely be mild or moderate, in part because the jobless rate remained near a five-decade low through 2022. In September, the rate unemployment fell to 3.5%, the lowest level since 1969. Yet even a mild recession would likely mean that hundreds of thousands of Americans would lose their jobs. Forecasters had expected the unemployment rate to reach around 4% to 6.5%, although it is still well below the 10% seen following the Great Recession of 2007-2009 and the near 15% at the start of the pandemic.

6. Could a recession be avoided?

In the United States at least, there was still hope that the Fed could pull off a so-called soft landing – slowing the economy enough to cool demand and bring inflation under control without tipping the economy into a tailspin. recession. A more painful route to avoiding an official recession would be a “growth recession,” which is a prolonged period of low growth and rising unemployment.

More stories like this are available at bloomberg.com


Comments are closed.