The world 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 higher.
The US has not had inflation this high since the 1970s. Europe is falling apart and must act quickly to reverse unreasonable energy costs in the colder weather months.
Sure, a lot of this stems from the war in Ukraine. But not all. Massive incentives and cash printing, coupled with policies aimed at punishing any company that makes anything from fossil fuels, have only made matters worse.
But while Europe is “gloomy,” as Goldman Sachs put it last week, other countries are in a similar plight. And they are not out there to punish farmers and oil companies, nor do they have sanctions against Russia.
Japan’s inflation is at an 8-year high. Brazil and India hike interest rates. The US yield curve inverted worsened on Friday, signaling a recession beyond the technical recession the economy was in during the second quarter.
Is it just bleak for the world economy or bleak and demise?
Recession? Which recession?
Look out for Biden’s White House to celebrate again when the third quarter economic data is released. If Barclays Capital is right, Q3 GDP grew 0.3% qoq, meaning the technical recession is over with consecutive quarterly declines. If this is the case, the markets should take this to mean that the economy is growing. And with inflation growing in tandem, the Fed won’t stop raising rates.
Investors need to get this pause thing out of their heads. The Fed, ECB and BoE will not keep inflation at 8% while interest rates are at 2%. (They are below 2% in Europe.) This contradicts the purpose of a central bank whose mandate is to control inflation.
Vanguard, one of the largest fund managers in the world, thinks the Fed is likely to run ahead of inflation trends and hit 75 basis points next. An increase of 100 points is not off the table, it said. They expect the benchmark rate to end at 3.75% this year and then 4.25% next year.
Since nobody is talking about a recession, the Fed will rise. Nor does Vanguard think this will lead to a recession.
“Given the strength of the job market, a recession is unlikely this year,” they wrote in a statement last week. “Our expectations for a recession are now the same as before, with a 25 percent chance of a recession in 2022 and a 65 percent chance in 2023.”
An American Express last week
From the latest Small Business Recovery Report, 37% said they plan to raise prices, 22% aim to negotiate better deals with suppliers, and 22% are eliminating lower-margin products and services from their offerings.