Gloom Or Doom For Global Economy? Vanguard Gives 65% Recession Odds

The global economy, led by the Western world, looks pretty broken, does it not? Vanguard’s not worried. They don’t think there will be a recession this year. Next year, however, the odds are higher.

Why?

The U.S. hasn’t had inflation this high since the 1970s. Europe is falling to pieces and needs to take quick action to reverse unreasonable energy costs heading into colder weather months.

Sure, a lot of this is due to war in Ukraine. But not all of it. Massive stimulus and money printing, coupled with policies geared to punish any company making something from fossil fuels, have only made matters worse.

Yet, despite Europe being “dire”, as Goldman Sachs put it last week, other countries are in similar straits. And they are not out there punishing farmers and oil companies, nor do they have sanctions against Russia.

Japan’s inflation is at an 8-year high. Brazil and India are raising interest rates. The U.S. inverted yield curve got worse on Friday, signaling a recession beyond the technical recession the economy was in in the second quarter.

Is it just gloomy for the global economy, or gloom and doom?

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Recession? What Recession?

Look for the Biden White House to celebrate again when third quarter economic data comes out. If Barclays Capital is right, third quarter GDP rose 0.3% from the previous quarter, meaning the technical recession of back-to-back quarterly declines has ended. If so, markets should take this to mean the economy is growing. And with inflation growing right along with it, the Fed will not stop raising rates.

Investors need to get this pause thing out of their heads. The Fed, the ECB, and the BoE will not let inflation stay at 8% while interest rates are like 2%. (In Europe, they are under 2%.) This defeats the purpose of having a central bank whose mandate is to control inflation.

Vanguard, one of the biggest fund managers in the world, expects the Fed will likely get ahead of the inflation trends and make the 75bps move next. A 100-point increase is not off the table, they said. They expect the benchmark lending rate to end this year at 3.75% and then to 4.25% next year.

Seeing how no one is talking about recession, the Fed is going to hike. And Vanguard doesn’t think that will cause a recession either.

“Recession looks unlikely this year given the strength of the labor market,” they wrote in a note last week. “Our expectations for recession are the same now as they were before, with a 25% chance of a recession in 2022 and a 65% chance in 2023.”

Last week, an American ExpressAXP
survey showed that small businesses nearly doubled year over year revenue, but economic challenges kept profits flat. Some 75% of those surveyed said their company is being impacted by inflation.

From the latest Small Business Recovery Report, 37% stated they plan to raise prices, 22% aim to negotiate better deals with suppliers, and 22% are cutting lower margin products and services from their offerings.