A RECESSION in America could bring some ‘short-term pain to markets but is likely to ease inflationary pressures in the West and create opportunities for investors’.
This was the message delivered to Jersey investment managers by Wall Street analyst Tony Dwyer, of Canaccord Genuity Wealth Management, during a recent visit to the Island.
Saying that key indicators relating to inflation, credit, economic activity and earnings were pointing to a recession in the US ‘by the end of this year’, Mr Dwyer said that such an event would not necessarily be ‘a bad thing for markets’.
‘A recession in the US will provide a welcome reset for markets and could ease inflationary pressures being felt across the western world,’ he said. ‘We believe the Federal Reserve is approaching the tail end of what has been one of the fastest scales of interest-rate hikes on record. Credit is going to remain tight and that is causing weak economic activity, but heightened fears of a recession in the US are also fuelling expectations of lower inflation to come and therefore rate cuts by the beginning of 2024.’
He added that most countries in Europe were experiencing a slowdown in their economies as central banks tightened rates, and lenders had become more cautious. Markets have been turbulent since the end of the Covid pandemic, with supply chains struggling to meet demand and the Russia invasion of Ukraine all affecting global trade and confidence.
Mr Dwyer said that there could be worse news to come from America and that any bad news ‘needs to be bad so that markets can fully reset, and therefore recover from a more solid base’.
‘The US market has never bottomed before a recession, and the recession hasn’t arrived yet,’ he said. ‘At the moment there are good short-term low-risk options for respectable returns, but investors should be ready for the longer-term opportunities that are likely to occur in the next few months, once the markets have fully adjusted.’
Mr Dwyer added that a recession in the US, and particularly a slowdown in consumer spending on goods, could have ramifications for other nations, including the UK and Channel Islands but may not prove negative for the global economy, especially if it relieved pressure on creaking supply chains, one of the major contributors to the current cost-of-living crisis.
Potential impacts of a US recession on the UK*
*Depending on factors including the severity and duration of the recession, the resilience of the UK economy and the effectiveness of policy response
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Employment: A US recession could lead to reduced economic activity and business contraction, which may have spill-over effects on the UK economy. This could result in job losses and increased unemployment rates in the UK, particularly in sectors closely tied to the US, such as finance, manufacturing and technology.
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Trade and prices: A US recession can affect global trade flows and supply chains. If the demand for UK exports to the US declines, it could put pressure on UK businesses, potentially leading to reduced production and job cuts. Moreover, if the value of the US dollar weakens during a recession, it may lead to higher import prices for UK consumers, impacting their purchasing power.
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Investment and financial markets: A US recession could lead to a decrease in foreign direct investment in the UK, as companies become more cautious with their spending. This could impact industries reliant on US investment, such as technology start-ups. Financial markets could also experience volatility, affecting pensions, investments and overall consumer confidence.
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Consumer spending: During a US recession, UK consumers may face uncertainties about the economy and job security, which could lead to reduced discretionary spending.
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Housing market: If the recession leads to a global economic downturn, this could result in reduced demand for UK properties from international buyers, impacting property prices and the construction industry. However, factors specific to the UK housing market should also be considered, as they play a significant role in its dynamics.
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Government policy and social impact: To mitigate the impact of a US recession, the UK government might implement policy measures such as fiscal stimulus packages or infrastructure investments. However, these policies may come with trade-offs, such as increased government debt or changes in public spending priorities, which can have broader social implications.
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Psychological impact: Economic uncertainty can have psychological effects on individuals. A US recession could create feelings of anxiety, job insecurity and financial stress among people in the UK.
