By François Rimeu, Senior Strategist, La Française AM.
The dichotomy between ever-present weak soft data (PMI surveys, ZEW, etc.) and solid hard data (industrial production, retail sales, etc.) continues with some economies refusing to slow down despite the successive shocks that most of them have experienced. This paradox is particularly true in the United States as well as in the eurozone but can also be seen in most developed economies. Are we in a recession or not? Is it possible – perhaps for the first time – that economists are right and have correctly anticipated a recession?
Indeed, many indicators suggest that a recession is on the horizon. The strong growth witnessed in 2021 and early 2022 was largely caused by massive budgetary outlays by the various governments as a result of Covid crisis. While 2022 also saw significant spending across Europe due to the energy crisis, this spending is relatively lower than in previous years. This is what we see on the top-right graph showing the credit impulse in the Eurozone, which has now been negative for over a year. Given the time lag of fiscal policies (between 12 and 18 months), these effects should have a negative impact on growth in 2023. The scenario is the same, but less marked, in the United States.
The Conference Board publishes an indicator that takes into account the ten most reliable advanced indicators in the United States (consumption, employment, etc.). Historical analysis shows that it is a reliable indicator for forecasting recessions in the US, since every time it goes negative for an extended period of time, a recession occurs sooner or later. According to this indicator, the recession will not necessarily be deep (nevertheless, it remains a possibility) and it should take place in 2023.
The real estate market is also a good benchmark to assess the health of an economy and the probability of a recession occurring. Broadly speaking, jobs derived from real estate activities represent about 14% of employment (source: Bloomberg) in the United States. Moreover, it is a market that adjusts very quickly when financial conditions change, which is the case today. With the sharp rise in mortgage rates over the past nine months, the housing market has already started to correct. Logically, this has a major impact on the confidence of the stakeholders in this sector. Thus, when confidence falls, activity falls, and unemployment rises. Unemployment registrations, which currently stand at 226K, could jump to over 400K by 2023!
In short, the vast majority of leading indicators point to an extremely high risk of recession in Europe and the United States. The timing is unclear but, currently, it seems like a highly likely scenario.