There is a tidal wave of warnings that the US, Europe and other parts of the world are quickly headed for a recession as key data points in that direction.
Under the underline ‘No more whispers’ Politics reported on Monday: “From Wall Street to Washington, whispers of an impending economic slump have risen to almost a roar as the Federal Reserve ramps up its fight against its highest inflation rate in four decades.”
The article cited price spikes — inflation in the US is at 8.6 percent — aggressive rate hikes that led to Wall Street’s worst first-half performance since 1970 and a drop in consumer confidence to an all-time low.
Economists, they continued, feared not only that a downturn would come, but that it would happen soon.
With so much economic activity in the US economy, both business and consumer, that relies on credit, the rate hikes implemented so far are having a significant effect.
The Department of Commerce has reported that GDP contracted 1.6 percent year-on-year in the first quarter, with estimates for second-quarter growth constantly being revised downwards. The growth estimate calculated by the Atlanta Fed indicates that GDP will contract by 2.1 percent year-on-year in the three months to the end of June.
The downward forecast came as the Institute for Supply Management’s Purchasing Managers Index showed the US manufacturing sector grew at its slowest pace in two years. Employment in the sector fell for the second month in a row after growing eight months in a row.
An indication of the effect of monetary policy tightening on consumer spending came with automaker General Motors’ announcement of a 15 percent drop in quarterly sales.
The clear slowdown in production is also visible in Europe. Eurozone production is weakest since August 2020, with new orders falling at the fastest pace since May 2020, according to S&P Global.
The commodities markets show the same trend. The price of copper, an important industrial metal known as Dr Copper because of the way it reflects broader trends, has fallen in the past month. Last week, it plunged below $8,000 a ton for the first time in 18 months, after hitting a record high of over $10,600 earlier in the year.
Yesterday, West Texas Intermediate, the US standard, oil prices fell below $100 a barrel, down 8.2 percent. The price of Brent oil, the international norm, fell 9.5 percent to $102.77 after futures traded at $120 a barrel a month ago.
The fall in the price of oil and other industrial commodities is not a sign of economic health, but of the increasing recessionary forces in the global economy.
As the president of an oil consulting firm, Jim Ritterbusch, tells the… Wall Street Journal: “The acceleration of recession expectations in the second half of the year has weighed on a whole range of commodities, and oil has been dragged in to a large extent.”
The US bond market, which is one of the main foundations of the global financial system, is also flashing red from a recession.
Yesterday, the yield curve inverted for the third time this year as the yield on the two-year Treasury bond rose above the 10-year yield. Normally the situation is reversed.
An inversion occurs when investors believe interest rates will rise in the short term, but in the longer term, the economy will slow down. This leads them to invest in the longer end of the market as a haven, which drives up the price of bonds and leads to a drop in their yield or interest rate.
Yield curve inversion does not mean an immediate recession, but this event has occurred in every recession in the US for the past 50 years.
Last week, Japanese financial house Nomura made a forecast that many major economies would plunge into recession in the next 12 months. It warned that a tightening of central banks’ monetary policy would dampen growth.
“Increasing signs that the global economy is entering a synchronized slowdown, meaning countries can no longer rely on a recovery in exports for growth, has also prompted us to forecast multiple recessions,” it said.
Nomura said he expected the US and euro area economies to contract by 1 percent in 2023. The contraction for mid-sized economies, including Australia, Canada and South Korea, could be greater if interest rate hikes trigger a burst of housing market inflation. It forecast a 2.2 percent contraction of South Korea’s highly industrialized economy in the third quarter of this year.
The deteriorating global economic situation is also reflected in another highly industrialized country, Germany, where business leaders are warning of the worst economic crisis in decades. The export-dependent German economy recorded a $1 billion trade deficit in goods in May, the first result since 1991.
After meeting German Chancellor Olaf Scholz, who had warned that Germany faces a “historic challenge”, Rainer Dulger, the head of an employers’ federation, spoke of “difficult years ahead”.
Indicating the broader forces at work in the global economy, he said: “We can no longer take for granted the continued economic growth we experienced before the COVID-19 pandemic and the war in Ukraine.”
Carsten Brzeski, head of macro research at financial firm ING, said Germany has always been able to count on strong exports to revive the economy, but that won’t be the case for the next two years.
“There is a high probability that Germany and the rest of the eurozone will enter a recession this year,” he said.
The receding storm clouds of the recession signal the need for the international working class to take stock of the economic events of the past decade and a half.
After the 2008 financial crash, triggered by financial speculation, central banks pumped out ultra-cheap money, leading to the escalation of stock markets to record highs as social inequality rose.
This meant that when the pandemic hit in early 2020, capitalist governments around the world refused to take the necessary public health measures to eliminate the pandemic or the financial bubble would collapse. Instead, they handed out hundreds of billions to the corporations while central banks pumped even more trillions of dollars into the financial system.
Coupled with the refusal to act on COVID-19, which led to a supply chain crisis, these measures set off the fastest spiral of inflation in four decades, exacerbated by the US-led NATO war against Russia in Ukraine.
Today, as workers push through with wage demands to maintain their social position, central banks are raising rates to try to break this movement through a recession.
These events indicate that the working class is confronted not with a series of cyclical economic developments, but with a systemic crisis of the entire global capitalist order that can only be solved in its interest by the struggle for an international socialist program.