Recessions often catch everyone by surprise. There is a very good chance that the next one will not.
Economists have been predicting a recession for months, and most believe it will occur in the first quarter of this year. Whether it will be deep or mild, long or short, is still up for debate, but the idea that the economy is entering a contraction period is practically consensus among economists.
“Historically, when you have high inflation and the Fed (Federal Reserve) is raising interest rates to contain inflation, it results in a slowdown or recession,” said Mark Zandi, chief economist at Moody’s Analytics, to CNBC. “This invariably happens – the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation rises and the Fed responds by raising interest rates, the economy ends up yielding under the weight of higher interest rates.”
Ironically, the Fed is slowing down the economy after having come to its rescue in the last two crises. The central bank helped stimulate lending by bringing interest rates to zero and increased market liquidity by adding trillions of dollars in assets to its balance sheet. Now it is unwinding that balance sheet and has rapidly raised interest rates from zero in March – to a range of 4.25% to 4.5% last month.
But the Fed now has a serious battle against inflation. It anticipates further interest rate hikes, and economists expect they may keep those rates high to control inflation.
What Will the Severity of the Recession Be?
A recession is a prolonged economic slowdown that broadly affects the economy and typically lasts two quarters or more. The National Bureau of Economic Research, the arbiter of recessions, considers that the deeper the slowdown, the longer it lasts.
“I expect a (recession) to be short and shallow,” said Diane Swonk, chief economist at KPMG. “The good news is that we should be able to recover quickly.”
Although the potential for recession has been on the horizon for some time, the Fed has so far failed to actually slow down employment and cool the economy through the labor market. But layoff announcements are increasing, and some economists see the potential for job declines in the coming months.
This Monday (23), Spotify (SPOT) announced it will cut 6% of its workforce to reduce costs. The company joins other tech giants like Amazon, Google, and Microsoft in reducing staff as the global economy slows down.
Source: CNBC