Searching For Shelter From The Next Economic “Hurricane” By


By Geoffrey Smith — Fears of a recession are growing in the developed economic world. The risks vary from country to country, but one group of countries is clearly having a harder time coping than most.

Spoiler: Despite Jamie Dimon’s “hurricane” references and Elon Musk’s “super bad feeling” about the economy, it’s not the United States that has the most problems.

The two deans of American capitalism both sent shivers through the financial markets last week with their respective remarks, and for good reason. Dimon, as chief executive of the nation’s largest bank, has better access to US household and corporate health data than perhaps anyone else in the country.

“This hurricane is right out there on the road coming our way,” Dimon said, adding that it was hard to tell if it was “a minor hurricane or Superstorm Sandy,” the storm that hit New York in 2012.

“You better get ready,” he summed up, after reminding his audience that JPMorgan (NYSE:) was bracing for a “non-benign environment” and “poor results.” Translated into plain language, this means a big increase in loan loss provisions in second quarter results, and a sharp drop in fees on new loans, as demand for home and auto credit is crushed by rising interest rates. ‘interest.

Former Goldman Sachs (NYSE:) CEO Lloyd Blankfein had been similarly gloomy last month, telling CBS Confront the Nation that the risk of recession had risen sharply as central banks hastily withdrew the excessive stimulus policies put in place to support the economy during the pandemic.

Dimon likes to hedge his disaster predictions and regularly points to the strength of household balance sheets as one of the reasons the US shouldn’t be heading into recession now. US household debt, measured against GDP, fell from nearly 100% in 2008 to less than 80% at the end of last year. (Curiously, his is more relaxed, saying that a U.S. recession at least isn’t “imminent.”)

However, that only tells half the story. Data from the Bank for International Settlements suggests U.S. businesses are heading into the rising interest rate cycle far more leveraged than before, the result of a decade in which debt financing has historically been cheaper to raise than equity. Corporate debt, which stood at less than 66% of GDP 10 years ago, is over 81%.

The federal debt has, of course, also risen unabated over the past decade due to sustained budget deficits. This suggests a much greater danger to growth if interest rates continue to rise in line with Federal Reserve guidelines.

Further afield, vulnerability to recession is arguably even greater, particularly in Europe, where the political imperative to punish Russia for its invasion of Ukraine has generated mostly artificial – but nevertheless acute – pressure on prices. energy that is now spreading rapidly throughout the economy. . The UK has already predicted that the UK economy will contract when the next rise in regulated energy bills hits doormats in October. The European Central Bank, meanwhile, will announce a new round of economic forecasts at its meeting on Thursday that are sure to show a sharp downward revision to growth for the year.

Then there’s China, another country grappling with a shock that is, if not man-made, has a large man-made component. China and PMIs have spent most of the last three months in contractionary territory due to lockdowns that have tried to spare factory output but made no concessions to consumers. As Shanghai and now Beijing begin to reopen, authorities have made it clear that any new outbreaks — perhaps of newer and even more transmissible variants of Covid-19 — will be met with exactly the same zero-tolerance response.

However, the countries most at risk are – as always – those that depend on others for their food and energy supply. At $120 a barrel, it hurts to be a net importer like or , especially if international tourism still isn’t generating the money it did before the pandemic. For countries like Pakistan, Egypt and Tunisia, which depend on Russia and Ukraine for their grain imports while being net importers of oil, the pressure is even greater.

That may be talking too much about a global recession – things are rarely so bad around the world for that to happen – but the likelihood that individual countries, or groups of countries with specific risk profiles, enter recession has risen sharply.

“Even if a global recession is averted, the pain of stagflation could linger for several years,” the agency warned on Tuesday, issuing another downward revision to its growth forecast for 2022. According to the bank, the problem of global inflation is so widespread that the real per capita income of 40% of people in developing countries will be below pre-Covid levels this year.

The worst can still be avoided, but the “super bad feelings” about the economy are likely to linger for some time to come.

Daniel K. Denny