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The United States, Europe, and Asia might be headed towards recession starting late this year or early next year due to economic trends and other risks, according to two global economists.

The pandemic’s effect — especially on China — and the war in Ukraine are two of the biggest factors as both disrupt supply chains and cause higher inflation.

“With the supply-chain disruptions, and elevated inflation, we're looking at weaker growth globally,” said Dana Peterson, Chief Economist and Center Leader of Economy, Strategy, and Finance at The Conference Board. “Central banks are also raising interest rates to tackle inflation to the ground in response to these shocks that are happening mostly abroad,” said Peterson. “[We also] have key demographic factors that are weighing on labor markets in the United States, Europe, China, Japan, and many other economies such as labor shortages, and also rising wages.”

Her remarks came during a media briefing held on Sept. 16 by the board titled “The Strangest Recession? Making Sense of the Economic Downturn.” During this event, Peterson explained “the big picture” in regard to the global economic outlook and key threats specifically to the United States, Europe, and Asia, as well as the financial forecasts for Europe. Eric Lundh, Principal Economist at the board, discussed the forecasts for the United States and the likelihood of a recession.

Peterson said that gas prices have already gone up tremendously in Europe and she predicts that they won't level off until quarter one of 2023, where they will start to go down. “There's also a risk that the ECB [the European Central Bank] may raise interest rates more than what markets are currently pricing and do so even sooner,” said Peterson. “Last week, the ECB raised its interest rate by 75 basis points.”

Lundh said that he expects to see inflation in the United States gradually slow from 2022 into 2023, but expects the Federal Reserve funds rate to increase close to 4% in early 2023, and then stay there. “As interest rates continue to rise, we're going to see as inflation does come down, but it's still an issue for consumers,” he said. “We're concerned about the Fed tightening even more than we expect. We're concerned about inflation, not abating in the way that we're anticipating. Presently, the housing market is a big question mark in terms of whether or not we see a meaningful decline in prices and government spending as well. We're concerned about the rolling out of some of the infrastructure spending that was passed last year. We’re expecting that to probably happen towards the end of this year and early next, but if that's delayed, that could put downward pressure on our forecast as well.”

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Because of the risks in the United States and Europe, there could be a global recession, Peterson said. “What can get us to a global recession?” Peterson asked rhetorically.“If China, Europe, and the United States all descend into recession, together they take up roughly 55% or constitute roughly 55% of global GDP. So those three economies having troubles can cause the entire global economy to go into recession.”

She also said that although she and Lundh expect a brief and shallow recession for Europe and the United States, Asia will likely face a “slowdown” instead.

One key question from the audience was about how Asia would avoid a recession as the two experts predicted. Peterson explained that since COVID was being mostly regulated by China and since it was working to move towards a consumer-driven economy, it is naturally going to have a slow-growth period. As for the rest of Asia, Peterson said it would be a “mixed picture.” “When we look at South Korea and Japan, they are struggling. South Korea has seen pretty significant increases in its interest rate because of inflation,” she said “Then you have other economies like the ASEAN nations that are doing quite well. They're still managing and a lot of it's because they have somewhat less exposure to China.”

Another important question came up about the overall U.S. labor market’s behavior for the next few months and into the possible recession. Lundh said that because of how the labor market drove up inflation, there may now be a “jobful recession” in the coming months. “We're not anticipating a huge increase in unemployment. That having been said, we do think that unemployment rates will rise, a touch,” he said. “So instead, what I think we're probably going to see more of is the cancellation of job postings by a lot of companies; hiring freezes, and things like that. I think that that you know, following the recession that we're forecasting, we're still going to see a tight labor market…with the wave of retirements, with a decline in the labor force participation rate that we've been seeing over the last several years, I think that post-recession we'll continue to see tightness in the labor market and elevated wage growth and things like that.”

Lundh, in answer to another audience question, said there’s a shortage of housing in the U.S. economy, but with the 30-year mortgage interest rate hitting 6% and expecting to rise, he predicts that prices will drop slightly within the coming months. Peterson added the ‘trifecta’ of factors — the Federal Reserve lowering rates to zero, a rise in remote work, and many millennials looking to buy housing — created a “perfect storm” to drive up prices around the time of the pandemic. Now that the Federal Reserve is raising interest rates, Peterson said it would make sense for prices to drop and for the pre-pandemic healthy job market to return. 

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