What would a European recession mean for the U.S. economy?

While Jury is still out whether the US economy is actually in recession, there are signals from across the pond that the economic outlook in Europe is deteriorating. Economist Mohamed El-Erian, chairman of the investment firm Gramercy Funds, said recently during a Gramercy webcast that a European recession is a “done deal.”

Other experts agree. “Europe is fighting mightily,” says the economist Aleksandar “Sasha” Tomic, associate dean for strategy, innovation and technology at Boston College. “If they’re not in a recession yet, they will be soon. It will be very difficult to avoid.”

If Europe slips into recession, how would that affect the US?

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As Tomic notes, Europe’s economic problems revolve largely around skyrocketing energy costs, and a lot of it has to do with it Russia’s invasion of Ukraine. Russia, which supplies gas to much of Europe, has responded to sanctions over its measures by cutting gas supplies, causing energy prices in some places to rise by nearly 1,000%.

“Europe handles inflation even worse than the US,” says Thomas Samuelson, chief investment officer at Colorado-based Vineyard Global Advisors, which peaked at 9.1% in August.

Samuelson claims the US is also facing the likelihood of a recession and is staring at some of the same problems but is feeling the effects of the war in Ukraine and the associated energy crisis to a lesser extent. Both Tomic and Samuelson say the impact of a European recession might not hit the US too hard since most European countries are relatively small trading partnerespecially compared to countries like Canada, Mexico and China.

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Tomic adds that a European recession could even lead to capital inflows across the Atlantic as investors flock to US markets in search of relative safety.

But with or without a recession in Europe, the US could still be headed for its own economic downturn. We are “between a rock and a hard place,” says Tomic, as policymakers must choose between further rate hikes, which stall the economy, or deal with persistent inflation.

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The Federal Reserve meet this week, and is expected to deliver another 75 basis point rate hike as it continues its anti-inflation crusade. That could slow the economy further, say some CEOs, including FedEx’s Raj Subramaniam they expect that these hikes will formally plunge the US into recession.

Tomic says the question now is how bad the US recession will be, noting: “There’s still a lot of uncertainty ahead.”

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