The world's two leading economies - Britain and Japan - have just fallen into recession, raising the question of whether the US is next.
On February 15, the world's two largest economies - the UK and Japan - both announced that their GDP fell in the fourth quarter of 2023. This means that both fell into recession, having had two consecutive quarters of negative growth.
This information raises the question of whether the US - currently the world's largest economy - is next. On February 15, the US Department of Commerce also released data showing that retail sales in the country fell 0.8% in January, ending two consecutive months of increases.
This shows that Americans are tightening their spending after the booming year-end shopping season. Consumer spending has been the driving force for the US economy in recent times.
However, many analysts believe that the risk of recession is quite remote. Because the fundamental factors of the US are different from the UK and Japan.
Paul Donovan, chief economist at UBS Global Wealth Management, said on February 15 that Japan’s economy is shrinking due to a declining population. The country’s population will fall by 800,000 in 2022, marking the 14th consecutive year of decline. This has limited growth potential, as “fewer people mean lower production and spending.”
In Britain, both population and wages have grown. However, the growth has not been enough to offset the fall in spending due to inflation. Consumption is one of the main drivers of growth in the economy.
Meanwhile, the situation in the US is completely different. In the past two quarters, the US recorded higher-than-expected GDP growth, mainly due to vibrant consumption.
People shop at a fair in New York City (USA). Photo: Reuters
Americans have been spending big since 2021. Initially, they were given cash handouts during the pandemic. Then they made up for it when the US emerged from lockdown. Compared to most other advanced countries, the US economy is still driven by consumption.
Another advantage is that the US is less dependent on Russian energy, which makes it less vulnerable to the spike in gas prices after the Russia-Ukraine war in February 2022. The US even became a major gas supplier to Europe after the conflict in Ukraine. Last year, it was the world's largest exporter of liquefied natural gas (LNG), according to Bloomberg.
The labor market is also solid. The unemployment rate has remained below 4% for 24 straight months, partly due to changes during the pandemic. The wave of layoffs during and after the pandemic has left businesses desperate for workers, forcing them to raise wages to attract new workers. Large-scale layoffs have also been limited in recent years, except in the tech sector.
However, the US can still be in recession without the public knowing. The reason is that the country's recession status is determined by the National Bureau of Economic Research (NBER). The NBER, founded in 1920, is a private research organization led by leading US economists. This organization does not affirm the widely used definition of two consecutive quarters of GDP decline.
Instead, the NBER defines it as “a significant decline in economic activity across the country, lasting more than a few months.” According to the NBER website, the organization uses six factors to assess the U.S. economic cycle: real personal income, nonfarm payrolls, employment from the U.S. Bureau of Labor Statistics’ household survey, real personal consumption expenditures, price-adjusted wholesale and retail sales, and industrial production.
GDP is therefore not the main factor that makes them conclude that there is a recession. In June 2020, without waiting for the second quarter GDP, the US National Bureau of Economic Research (NBER) confirmed that the US had been in recession since February. Meanwhile, in 2022, after the US recorded two consecutive quarters of decline, the NBER still did not announce a recession.
In December 2023, Fed Chairman Jerome Powell said the risk of a US recession had increased after the Federal Reserve began raising interest rates in March 2022. However, he also affirmed that "there are no fundamental factors that indicate the economy is in recession".
However, Powell stressed that even when the economy is bright, the risk of recession always exists. The reason is that unexpected economic shocks, such as the pandemic, can appear at any time.
Philipp Carlsson-Szlezak, chief economist at Boston Consulting Group, also does not think the US will fall into recession this year. Instead, he believes the country will "slow down."
"The US economy is buoyant thanks to strong fundamentals. Among them are personal finances and the labor market," he said.
Still, Carlsson-Szlezak said there is one possibility that could push the US into recession: the Fed doesn't cut interest rates this year.
Investors are predicting multiple Fed rate cuts in 2024. So if the Fed doesn't cut, financial markets will be in turmoil, possibly triggering a recession, Carlsson-Szlezak concluded.
Ha Thu (according to CNN, Reuters)
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