Economic downturn: The global world economy before the recession

Disruptions in the supply chains:

The new restrictions imposed by the corona lockdowns in China put further strain on the economy, which was already weakened by the pandemic, in the second quarter

Photo: Christian Charisius/ DPA

There are already many indications that the International Monetary Fund (IMF) has now made the precarious global economic situation even clearer in its current forecast.

"A tentative recovery in 2021 will be followed by increasingly gloomy developments in 2022," the new IMF report says.

As a result, economists are now only assuming global economic growth of 3.2 percent.

That is 0.4 percentage points less than assumed in April.

The new forecast mainly reflects slowing growth in the world's three largest economies - the United States, China and the euro area.

A look at the US economic data shows how justified the fear of a recession, i.e. a decline in gross domestic product (GDP) for at least two consecutive quarters, is.

Because in the first quarter, GDP in the world's largest economy fell by a whopping 1.6 percent (US growth figures are extrapolated for the year and are therefore not directly comparable with growth data from Europe).

Economists are expecting an increase again for the second quarter, but only by 0.4 percent.

So it's going to be tight.

Whether this estimate is really realistic will become clear this Thursday at the latest when the growth figures for the second third of the year are published.

US Federal Reserve fights high inflation

One of the main reasons for the weak growth in the USA is the prices, which continue to rise due to the ongoing problems in the supply chains and the Ukraine war.

The inflation rate in June jumped surprisingly sharply from 8.6 to 9.1 percent.

That was the highest level since November 1981.

In the fight against inflation, the US Federal Reserve (Fed) therefore heralded a turnaround in interest rates as early as spring.

At their last meeting in mid-June, the monetary watchdogs responded with the largest rate hike since 1994 and raised the key interest rate by a further 0.75 percentage points.

The interest rate is currently in the range between 1.5 and 1.75 percent.

The Fed is expected to decide another large rate hike of 0.75 percentage points at its meeting today, Wednesday.

According to many economists, the key interest rate will probably be over 3 percent by the end of the year.

But raising interest rates to combat high inflation usually does not result in collateral damage.

After all, the higher interest rates for companies and consumers also mean higher borrowing costs, and the willingness to invest and consume is dampened.

There is a risk that the economy will stall.

In the past few decades, very few monetary tightening measures in the USA have remained without economic damage.

Big US banks' profits plummet

And even now companies and markets are reacting to the rate hikes.

A look at the balance sheets of the major US banks reveals how badly the institutes are already being affected by the economic uncertainties.

Goldman Sachs, JPMorgan, Bank of America, Wells Fargo and Citigroup traditionally open the respective accounting season with their quarterly results.

And a look at the books shows a significant drop in profits for almost all of them - and provisions in the billions.

Apparently, the banks are preparing for a recession.

All signals are also set to red for companies.

Starting with start-ups such as Klarna, Gorilla and Getir, the wave of layoffs and hiring freezes have already spread to established corporations such as Microsoft, Meta, Tesla and Google.

Recently, the bond market has also reacted to the impending recession: two-year US government bonds have yielded more than their ten-year counterparts.

This inverted yield curve phenomenon is seen as a harbinger of a recession.

Copper price falls below $7000

The development of the copper price is also regarded by economists as a leading indicator of the state of the economy, and the term "Dr. Copper" is often used in this context.

About a week ago, the price of a tonne of copper on the London Stock Exchange fell below the $7,000 mark for the first time since November 2020.

Since the high in early March, the price has fallen by more than 30 percent.

The reason for the strong price decline was weak economic data from China.

In the second largest economy in the world, the economy lost momentum significantly in the second quarter.

Due to strict corona measures, economic output only grew by 0.4 percent compared to the same period last year.

It is the weakest quarterly growth since the beginning of the corona pandemic.

At the beginning of the year, China's economy had grown by 4.8 percent.

US labor market braces itself against the recession

US Treasury Secretary

(75) is not as pessimistic about the future as others.

"I'm not saying we can definitely avert a recession," Yellen told NBC on Sunday.

"But I think there is a path that keeps the job market resilient and lowers inflation," she said.

"If you create almost 400,000 jobs a month, that's not a recession," Yellen continues.

After all, recessions are usually accompanied by millions of job losses.

The job market in the USA is in fact still a small ray of hope.

372,000 new jobs were created in June, significantly more than expected.

At 3.6 percent, the unemployment rate was at its lowest level in almost 50 years.

It is questionable whether this trend will continue in view of the massive layoffs in the large corporations.

Leading indicators also point to a downturn in Germany

In Germany, too, the economic situation is coming to a head.

Here, high energy prices and the threat of gas shortages are putting additional strain on the economy, as Germany is much more dependent on Russian gas than other countries.

The news that the Russian state-owned company Gazprom wants to further reduce deliveries to Germany via the Nord Stream 1 pipeline only caused a stir again on Monday.

If Russia stops supplying gas completely in the short term, Germany will in all likelihood slide into a recession.

A number of leading indicators are already pointing to an economic downturn in Germany.

The business climate index of the Ifo Institute, which is determined on the basis of a survey of around 9,000 managers, fell by 3.6 points to 88.6 points in July compared to the previous month.

That was the lowest level in two years.

"Germany is on the threshold of recession," commented Ifo President

(53) on the situation.

According to the survey, the likelihood of a recession is 96 percent.

The purchasing managers' index for the private sector also fell further in July: at 48 points, the barometer fell below the important threshold of 50 points, from which it signals growth, for the first time in months.

In the industry, orders are also backing up due to the disrupted supply chains, and growth forecasts have already been revised significantly downwards.

At the same time, producer prices are climbing from one record high to the next.

ECB with first rate hike in eleven years

In the meantime, the inflation rate in Germany has risen to 7.6 percent due to the gas crisis and the ongoing problems in the supply chains.

In order to combat inflation, the European Central Bank (ECB) finally heralded the turnaround in interest rates last week after much hesitation and raised the key interest rate for the first time in eleven years.

In a major interest rate hike, the ECB Council headed by

(66) raised the interest rate to 0.5 percent.

The ECB also held out the prospect of further interest rate hikes.

Other central banks such as the US Federal Reserve and the Bank of England have already raised their interest rates several times.

Critics therefore accuse the ECB of initiating the turnaround in interest rates far too late.

However, the central bank must act cautiously, since there is not only a risk of recession in the euro zone, but also highly indebted countries such as Italy, for example, will come under even greater pressure with an interest rate hike.

As interest rates rise, it becomes more expensive for them to raise fresh money on the bond market.

In the first quarter, GDP in Germany had increased by 0.2 percent compared to the previous quarter.

The data for the second quarter will be published next Friday.

In any case, the IMF is looking bleakly into the future: In Germany, gross domestic product is only expected to grow by 1.2 percent this year.

So far, the economists had assumed an increase of 2 percent.