Will Europe and the United Kingdom survive the American recession? LMF Myfinance

Currently see the economic consensus Increase the risk of a recession in the United States and reduce the same risks in the United Kingdom and the eurozone. This is a significant change from earlier this year, when the probability of a recession within the next 12 months was estimated at a remarkable 90% in the UK, 80% in Europe and 60% in the US.

In fact, last week saw a big jump in initial jobless claims in the US, and in the past this move was followed by a recession. However, the move appears to reflect fraud in Massachusetts, and research from Deutsche Bank suggests that the upward trend in unemployment claims that has characterized 2023 so far will tend to fade if these fraudulent claims are taken into account.

Moreover, last week’s new data exposed the fears of many – myself included – that troubled US regional banks could lead to a credit crunch. Both the Federal Reserve’s Survey of Chief Loan Officers and the Small Business Survey showed no decline in credit availability. In fact, they have shown the opposite.

So, are economists wrong about the risks of a recession in the United States? In my opinion, no, and I remain faithful to the prediction of a recession in the United States by the end of the year. The credit crunch may have been averted, but the crisis is still going on. Credit may still be available, but terms are more difficult and higher rates will have an impact. Borrowers reduce the demand for credit and consumers run out of resources. The latter benefited greatly from “Covid piggy banks” in 2022, but there are many signs that this support has stopped. This week, we’ll get more insight into the consumer spending outlook thanks to retail sales data and earnings reports from Walmart and Home Depot.

If the US enters a recession later this year, will the UK and Europe follow suit? I think economic data will continue to improve in Europe and the UK throughout 2023. Consumer confidence is improving in both countries, thanks to lower energy prices, and that could lead to higher spending. We’ll likely see these trends repeated in business as well.

What does all this mean for financial markets? A recession in the US would likely mean a decline in US stocks, and given the prevailing bearish mood among analysts and investors, any declines should be modest. However, US stocks are likely to underperform stocks in Europe and the UK. Secondly, US interest rates are expected to fall by the end of the year, although they will rise more first. This means that the dollar’s recovery last week should be temporary. Therefore, after some fluctuations, US bonds should recover.