He already entered the house without us noticing. But this is an unacceptable opinion, since based on a survey conducted by one of the largest banks in the world, in the OECD countries that make up about 60% of the global GDP, the percentage of analysts who believe there will be a recession has dropped in recent months from about 50% to only 30%. Technically, the definition of a recession is two consecutive quarters of a negative real growth rate of the gross national product. But to be honest, we should be more precise: even a continuous decrease in the growth rate, even without an arbitrary designation of a time period such as a quarter, is a recession in every sense.
We are there without a doubt: The figures for the last quarter of 2022 that have already been published in the US show that in constant dollar terms the real GNP (including imports) increased in the entire year 2022 by only 192 billion dollars (0.96%) when, please note, the entire increase is explained by the increase in the scope of services (276 billion) while in the other sections indicating a future trend, such as investment, there was a decrease of about 100 billion. The report will probably undergo a downward revision because in the reported figure there is only an estimate of the output of private companies which will be finally clarified during the quarter.
For the skeptical reader who believes that the figure above is not relevant to Israel because it is an isolated island that the floating cloud will pass over its head – this is a critical mistake.
Economic slowdown or recession? The limit is thin, since in any case this involves the dismissal of hundreds of thousands of workers and the reduction of investment which is the engine of future growth. But most of the indications describe an existing situation or a past occurrence. Let’s see what the indications are in the whole world:
The negative factors that explain why we are already in a period of slowdown or recession:
The labor market – In several European countries (Denmark and Austria) there are already signs of an increase in the level of unemployment. The wave of layoffs in the international technology companies that is also leaking to the large conglomerates will show its signs soon. Usually the unemployment index is a parallel index to a recession, that is, it is not a preliminary index. A slightly preliminary measure is the rate of change in the awareness of job offers. This index showed a 10% retreat in the recent period.
inflation – this is still celebrated in the OECD countries at an annual level of 5-6%. It is likely that this trend will moderate on its own, when the rate of GDP slowdown intensifies. A survey conducted this month in the US indicates a small percentage of manufacturers’ intentions to raise prices – a clear sign of a slowdown. This fact is also reflected in one-year inflation expectations, which fell significantly in January 2023. In any case, a high inflation rate affects the nominal interest rate when a level High interest rates will significantly reduce profit rates in the private sector on the one hand, and will also make it difficult for countries to finance their budgets through debt.
energy prices – A relatively warm winter lowered gas consumption in Europe by 26%, but prices, which have moderated since August 2022, are still high. The uncertainty of gas supply from Russia contributes quite a bit to this negative factor.
The opening of China after the corona pandemic contributes quite a bit to upward price pressure on the prices of basic products. Add to that the fact that in China, which “subsidized” inflation in the West for several decades, there is a dramatic increase in prices.
monetary policy – Continuation of the policy of raising interest rates in all developed countries except Japan, in order to moderate the rate of inflation. The experience of the early 1980s indicates that the immediate effect is a substantial decrease in GDP growth rates.
fiscal policy – A decrease in profits and an increase in unemployment and the addition of the burden on unemployment insurance will very quickly turn budget surpluses into considerable deficits (without reminding Israel that the coalition agreements impose an additional budget burden). The US is at the upper limit of its ability to raise debt. Although the administration can decide to raise the ceiling, but in any case this means additional pressure as it increases interest rates.
on the other hand – The only positive factor that can be noted is the financing capabilities available to the private sector. A particularly high savings rate in recent years has meant that in the 7 developed countries the amount of available cash is about 3 trillion dollars, which is about 10% of the total expenditure for private consumption. This rate is much higher than the multi-year average, which may reduce the pressure on interest rates.
All these factors already exist and are known to all, so they are embodied in the reported results of the current product. Therefore, it is more important to try to predict the future trend of the above-mentioned factors. If these factors continue to operate at their current level, the slowdown will continue, but the probability of reaching a negative growth rate is relatively low. One leads to other factors.
Let’s remember only one interesting fact of practical significance: the securities market reacts much faster than the reporting of changes in GDP. This means that it is possible that in the midst of an economic recession with negative growth rates, the securities market will change trend and move to considerable increases. Securities market participants, at the peak of pessimism about what is expected, become “irreparably optimistic” and any slight hint of the possibility of change shapes a positive expectation process. At that time, risk premiums in the bond market decrease and reduce returns and the price of capital decreases in the stock market. The first to react are the large investors whose risk aversion is lower. Then the institutional investors join in and only at the end of the process does the public join in, and sometimes too late.