Recession knocks on Europe’s doors and pursues the US, despite contradictory signals

He European Central Bank (ECB) has already cooled the eurozone economy, but the Federal Reserve (Fed) He hasn’t gotten it yet. However, experts warn against claiming victory when it comes to soft landing of the world’s leading economy, despite the fact that the recession is taking longer to arrive and previous predictions have not come true. The United States is going to follow in Europe’s footsteps in terms of falling consumption or weak business results, although the market is not yet reflecting it. The low risk premiums of the stock market and credit on the other side of the Atlantic are false signals and, its GDP, too.

The ECB’s interest rate increases are being reflected in the euro economy, which has been stagnant for months. The Gross Domestic Producer (GDP) around 0%, with a few tenths of variation, but, ultimately, it shows zero growth. With the advantage that the Fed has in the restrictive cycle, US strength has given several surpriseswith a GDP that is close to 5%.

In the eurozone, the composite PMI, which was considered a leading indicator, has suffered its biggest contraction since November and has fallen to 46.5 points in October. A reading below 50 points indicates recession and, above, expansion. It has been under that dividing line since June, without rest. But in the United States, this index exceeds 50 points in its latest readings, so it still does not paint that panorama of deceleration.

However, it seems that the US will soon imitate Europe. In the euro countries, Christine Lagarde and her team have already achieved that interest rates have put an end to the excess savings from the pandemic that were used for private consumption. On the other side of the Atlantic, this has not yet happened, as consumption has boosted the economy. But this trend also It will end soon.

The disposable income of North American families has fallen for four months, their savings are running out and consumer credit has plummeted to its lowest level in decades, except for the pandemic, and is in negative territory. These are the reasons ING analysts warn of the stress that households will experience: “Consumption is key and its fundamentals are weakening,” warns James Knightley.

“Given this situation, we need to see fundamentals improve quickly. Household disposable income is critical for the economy and if it does not recover, we fear that the economy will go through a contraction in the second and third quarters of 2024,” he adds.

However, the market still has not adjusted prices to the macroeconomic risks that lurk. Bank of America (BofA) argues that this can be seen in the global stock market risk premium, 4% and its lowest level in 15 years, and the spreads on high-yield debt, which are around 300 basis points. , close to its lowest range. Recessions coincide with spreads of 1,000 basis points. “Although the dominant narrative is bearish, these data suggest that the macroeconomic adversities have barely been priced,” says the entity’s weekly strategic report for Europe.

The reason for this anomaly, a bearish narrative and a low risk premium when it should be high, It is in the surprising strength of the United States, according to analysts Sebastian Raedler, Thomas Pearce and Andreas Bruckner. Economic growth reduces the risk premium, which is what has happened.

“In our opinion, the strength in the United States, despite the weakness of the credit cycle, is due to the fiscal impulse and the pending orders that companies have since the pandemic. We expect these special support factors to fade in the coming months , which point to a pronounced slowdown next year,” defend the BofA strategists. Likewise, risk premiums will be adjusted to this reality.

Meanwhile, Europe already has given another warning signal in the results, anticipating, again, the United States. Stoxx 600 earnings per share were 8% lower than expected. But in the country of the stars and stripes, profits have been 8% better than analysts’ forecasts. However, a large part of experts consider that the deterioration in corporate accounts will arrive in the current quarterboth in profits and income.

Likewise, the US companies that have already rendered accounts have warned about the clouds they see on the horizon, since they have anticipated that They expect weak demand in 2024. According to Bloombergis the highest number of warnings since the agency collected this information.

“We expect a significant slowdown in the fourth quarter,” note Pimco’s Tiffany Wilding and Alison Boxer. The manager also warns that American strength It does not reflect the weakening that will come in the coming months. The degree of slowdown, however, will depend on future rate decisions, they clarify.

Precisely for this reason, the market is anticipating that the restrictive cycle It is finished, both in Europe and in the United States. In Lagarde’s area of ​​influence because that weakness has already come to light and, in the case of Jerome Powell’s area of ​​authority, the cracks will open in the short term. In no case is it considered that there is room for a further increase, since the effects of the monetary restriction are already underway, a hypothesis that has confirmed the rise in unemployment and the lower job creation in North America.