Has the recession been called off? Fears seem to be fading by the day if economic data is to be believed
Just a few weeks ago, there was widespread expectation that Europe’s economy was poised for a hard landing as economic losses from inflation, rising debt costs, falling stock markets and recessions in war-torn Ukraine and Russia piled up.
n just this month, the World Bank forecast a dismal, no-growth 2023 for Europe, a declining growth rate in the US and a sharp, prolonged slowdown that will rock developing countries.
Add to that a tech sector shedding labor after decades of a hiring boom, investor confidence from Britain’s ‘mini-budget’ under Liz Truss’ short-lived tenure, and months of great uncertainty about the price of basic energy and food supplies.
No wonder consumers clutched their debit cards tightly through December, plunging into a New Year’s bankruptcy.
But the bust has not arrived. The risk of a recession appears to be diminishing almost by the day, at least if the economic data are to be believed.
This week’s Euro Composite Purchasing Managers’ Index (PMI), a useful and regular guide to private sector health, was the first in seven months to show real growth, spurred by widening optimism among business leaders themselves and the Mood in turn lifted as it was released.
At home, the Credit Union Consumer Sentiment Index for January also hit a seven-month high as public sentiment was boosted by falling fuel prices, the dampening effect of cost-of-living supports including electricity credit, and their own relief at weathering an unusually hard financial holiday . Even the housing market has some welcome news with higher than expected new home deliveries and falling prices.
People are still nervous but sentiment is more optimistic, a trend seen across Europe this month with the exception of the UK.
This better sentiment is being achieved privately by CEOs and senior bankers, whose corporate early warning systems are increasingly turning back to green from red over the last year.
The big thing is that natural gas prices have fallen back
It all begs a pretty obvious question – what, if anything, has changed?
“The big thing is that natural gas prices have come back from the really shocking levels they reached in August,” said Conall MacCoille, chief economist at stockbroking firm Davy.
On the wholesale markets, the price of natural gas is now below pre-invasion levels, underpinning the big confidence boost.
Consumers and businesses have yet to benefit, but wholesale gas prices have fallen 70 percent in the five months since Russia’s state-owned gas company Gazprom drastically halted supplies to Europe through the Nord Stream 1 pipeline.
Many had feared that the loss of Russian gas could wreak havoc in Europe, risking power and heating outages and shutting down German factories. None of that happened. Instead, a mild winter, a rush of alternative marine gas supplies from the US, Qatar and Australia, and frugal consumer usage have pushed supplies to record levels, which has helped policymakers resist Russian efforts to end support for Ukraine to undermine, and to keep jobs and households going through the winter.
However, it is not a matter of course.
“Gas prices could easily rise again if the supply situation changes,” warns Mr MacCoille.
Still, he sees a significant chance of inflation falling sharply this year after being boosted sharply by energy prices in 2022. The reopening of China’s economy after the delayed exit from Covid restrictions should also help solve the supply chain problems that initially fueled higher inflation in 2021, MacCoille says.
It all took a real toll on incomes over the past year, dampening consumer sentiment and prompting central banks to hike interest rates at a pace that, if well intentioned, only worsened the financial hit.
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Corporations like Google are cutting staff. Photo: Tayfun Coskun Agency/Anadolu via Getty Images
If the inflation outlook changes, central bankers will have to revise their current stance of frequent and relatively large rate hikes. The European Central Bank (ECB) is set to raise interest rates by another half a percent next week and central bankers are talking hard about further hikes for now, but financial markets are increasingly seeing rate hikes coming to an end in months rather than years.
So have we dodged an economic bullet?
More like we built an armored car, as Eddie Casey, chief economist at the Fiscal Advisory Council, describes it.
The main reasons for the recovery in consumer and business confidence are the result of successful policy interventions, he says.
At home, the September budget included a massive €4 billion “living expenses package” that has provided cash directly to almost every home and many businesses across the country in recent months. At the European level, work has been going on to replace Russian gas at a pace and determination rarely seen before in the EU, including courting support from US President Joe Biden and a raft of financial aid.
Without these political measures things could have been worse
According to this view, the risk of recession has been averted rather than subsided.
“There was a point when energy prices were shooting up where the risk of a more severe recession was greater,” says Casey.
“Policy response has made a huge difference – EU energy policy and support for household living expenses here. Without these policies, things could have been worse.”
Where does that leave us?
We may not be headed for a crash anymore, but that doesn’t mean the outlook is particularly rosy, stresses Mr MacCoille.
“Will people feel the difference when an economy grows 0.1 percent instead of shrinking 0.1 percent? There will still be pressure,” he says.
The risk of a deep recession is receding, but growth will be significantly lower this year, even in Ireland, where we have grown accustomed to official figures flattered by the machinations of multinationals.
Avoiding a recession is more likely to mean a slowdown in job growth than mass layoffs, which will particularly hurt people entering the labor market, but nothing like the kind of dislocations seen after the 2008 crash.
It likely dashed hopes of a post-Covid consumption boom, despite the huge accumulation of household savings.
The outlook is not fantastic, but the threat of a deep and painful recession is receding almost as fast as it was last year.
https://www.independent.ie/business/world/has-the-recession-been-cancelled-fears-appear-to-be-dwindling-by-the-day-if-the-economic-data-is-to-be-believed-42316622.html Has the recession been called off? Fears seem to be fading by the day if economic data is to be believed