“There is talk of a recession, but we believe that there will be a very clear slowdown, particularly in sectors sensitive to interest rates, such as housing and consumption, said Alejandro Saldaña, chief economist at Ve por Más (BX+). .
For Jessica Roldán, Chief Economist at Finamex, the times the world is experiencing are unprecedented: “In these years we are experiencing unprecedented times in the sense that after historically high contractions we had a very rapid recovery. So we are probably seeing a recovery to the growth levels that we saw in 2021.”
Signs of recession?
There are two definitions for a recession. The first is when two consecutive quarters accumulate with falls in economic activity. The second is when the economic cycle is below its potential, that is, the long-term trend, explained Héctor Magaña, professor of Accounting and Finance at the Business School of the Tecnológico de Monterrey Campus Estado de México.
“It is very difficult to forecast a recession,” Roldán said. However, he added, there are certain indicators that have had a “correlation” with economic activity, particularly speaking of the yield curve. “A recession in the United States is preceded by a period in which the yield curve inverts, is negative” and short-term rates are higher than long-term rates, he said.
The fact that long-term rates are low implies that in the future there will be a decrease in the interest rate, in response to a slowdown in economic activity, added the Finamex economist.
There is another indicator, the VIX index -which measures the volatility of the S&P 500 for the next 30 days-, which has increased in such a volatile environment, explained Ernesto Revilla, chief economist for Latin America at Citigroup.
“The VIX index is also known as the fear index,” he added. Another important indicator is inflation, which in May registered 8.6% at the annual rate in the United States, a level not seen for four decades.
Not all indicators show that the United States will enter a recession, Magaña said.
Employment figures, an important indicator, show contradictory figures, because although employment growth is expected to continue, which could lead to the unemployment rate below 4%.
To deal with high inflation, The Fed announced an increase of 75 base points to the interest rate to leave it in a range between 1.5% and 1.75% . This increase, the analysts consulted agreed, will have an impact on the demand side, reducing consumption and financing.
Thanks to the economic incentives that were given to American families to face the closure of activities, there are resources to acquire products and services, but there is not enough supply due to the pandemic, the closures in China, the shortage of some supplies, and the war between Russia and Ukraine.
“The US economy is overheated, with too much inflation, and monetary policy has to raise interest rates to cause a slowdown,” impacting demand, said Revilla, of Citigroup.
The time in which movements in the interest rate are reflected in the economy is between six and 12 months, so if there is a recession in the United States, it would last until next year. The question now is whether there will be a “soft landing.”
“It’s not that it can’t be done, but history shows us that it is very difficult to gently land the great plane that is the US economy,” he stressed.
In more than the Fed’s monetary policy, Roldán of Finamex pointed out, the low long-term rates are due to the capital that the US central bank injected during the pandemic -almost 9 trillion dollars- raising the balance sheet from 18% to 35% of US GDP.
“When the central bank injected all that liquidity, it artificially compressed various premiums for risk, and that makes medium and long-term rates particularly low,” said Jessica Roldán.