By Philip Aldrick, Enda Curran and Michael Sasso
The recession calls are getting louder on Wall Street, but for many of the households and businesses who make up the world economy the downturn is already here.
Take Gina Palmer, who runs She Salon on Atlanta’s busy Northside Drive west of downtown. She’d ordinarily expect her business to be alive with the din of customers on a Friday morning. But on that day late last month, it was largely empty and quiet, save for a few employees. With summer break moving into full swing, her clientele is preoccupied with affording summer camps for their kids amid soaring food and gasoline costs.
“When people look at their budgets, the first thing they cut is self care,” Palmer said. “I’ve seen my clients go from having weekly appointments to bi-weekly, and my bi-weekly clients are now coming in every six weeks.”
4,000 miles away, Abbie Marshall, the landlady of The Buck Inn in the countryside of northern England, is also trying to cope with surging costs. When she took over the pub last year, she ran the numbers on a 4% inflation rate—an assumption that would normally be seen as conservative given it’s twice the Bank of England target. But now it’s above 9% and rapidly heading for double digits.
Marshall has changed the costs on her menu four times and raised the price of a pint of beer on three occasions.
For Palmer, Marshall and many others, the technical definitions of a recession—traditionally two quarters of contraction—are irrelevant.
Goldman Sachs Group Inc. economists put the risk of such a slump in the US in the next year at 30%. A Bloomberg Economics model sees a 38% chance in the same period, with the risks building beyond that time frame. But for many it already feels like it’s here. More than one-third of Americans believe the economy is now in a recession, according to a poll last month by CivicScience.
The worries among small business owners, consumers and others are illustrated by so-called Misery Indexes, which blend unemployment and inflation rates. The gauge for the US is already 12.2%, similar to levels witnessed at the start of the pandemic and in the wake of the 2008 financial crisis, according to Bloomberg Economics.
The UK is similarly elevated, and other measures echo that grim view. US consumer expectations as measured by the Conference Board have dropped to the lowest in almost a decade. Sentiment across OECD member countries has fallen for 11 straight months and hasn’t been this low since 2009.
“People are getting poorer,” said Ludovic Subran, chief economist at Allianz SE. “So this is not a recession, but it really feels and tastes like a recession.”
The reason? Prices are soaring worldwide, particularly for essential foods and fuels, eroding the spending power of families. Central banks are responding to the inflation surge, but as they push up interest rates that turns the screw on those with debts. Workers are complaining their wages aren’t keeping up with the cost of living, a frustration that’s already led to strikes in some countries.
Quite simply, people’s money is disappearing fast, and they’re worried it could get a lot worse.
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And as 2022 hits the halfway mark, new worries are taking hold. Layered on top of the inflation squeeze are the mounting concerns about the outlook for economic growth, not just this year, but into 2023. That’s sparked talk of stagflation, a nasty cocktail of little to no growth—or worse—and faster than usual price increases.
The situation is a far cry from what was once expected for 2022 and beyond, which for a time included the idea of a new “Roaring Twenties.” Instead, euphoria is in short supply and the narrative is one of downgrades.
Last month, the OECD cut its outlook for 2022 global growth to 3% from 4.5%, with even slower expansion seen next year. The World Bank lowered its projections, warning of “danger” for the economy.
There’s also alarm in markets, where the S&P 500 has plunged more than 20% from its January high, and the Stoxx Europe 600 is down about 19%. The near-constant stream of warnings, along with gloomy headlines, mean there’s a chance that a recession becomes a self-fulfilling prophecy, where apprehension forces consumers and businesses to hunker down and cut back on spending. That would suck demand out of the economy, exacerbating any downturn.
A 2021 paper co-authored by Danny Blanchflower, a Dartmouth College economics professor and former BOE policy maker, said that declines in US consumer expectations gauges of 10 points or more, from either the University of Michigan or Conference Board surveys, are predictors of recessions going back to the 1980s. The Conference Board measure is down almost 30 points this year.
“The risk of a self-fulfilling recession—and one that can happen as soon as early next year—is higher than before. Even though household and business balance sheets are strong, worries about the future could cause consumers to pull back, which in turn would lead businesses to hire and invest less.”
—Anna Wong, chief US economist at Bloomberg Economics. Read more here.
For the US, the National Bureau of Economic Research is the official arbiter of recessions, which it defines as a “significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Any such declaration will usually only come well into a slump, or even after it. In the meantime, the debate rages on. Deutsche Bank AG Chief Executive Christian Sewing sees a 50% chance of a global recession, a prediction that Citigroup Inc. economists have also made. Federal Reserve Chair Jerome Powell says a US recession is a possibility, but not inevitable. Morgan Stanley economists expect a mild euro-area recession at the end of 2022.
Away from that back and forth, businesses and consumers are fretting about their finances and trying to figure out how to keep their heads above water as the pressures intensify.
Inflation was already heading higher coming into 2022 amid a post-Covid demand bump. Then Russia invaded Ukraine, energy and food costs jumped, and the world found itself dealing with soaring prices, a very unfamiliar situation after years of low inflation. Gasoline in the US topped an average of $5 per gallon for the first time last month.
Given the impact on basics, from filling the gas tank to the supermarket run, few have escaped the squeeze.
In New Mexico’s capital city, the cowboys at the annual Rodeo de Santa Fe last month were sweating the price of fuel more than mounting a 2,000-pound bull. The number of entrants in the contest fell by a third, which President Jim Butler blames on the price of gasoline. While farmers and truckers can pass along their fuel costs, “the cowboys don’t have it,” he said.
The tough times stretch to Asia too, where China’s Zero-Covid policy and lockdowns sent the world’s second-biggest economy into a tailspin, compounding the damage from a real estate slump.
In Beijing, 31-year-old Tian Lijun began the year shutting the two florists she ran. After finding work as a sales representative for a high-end medical clinic, she lost that job in May. To make ends meet, she’s taken to selling flowers at stalls in community compounds and stopped shopping for anything beyond necessities.
“There’s no way to make money nowadays. I can only manage to repay my loans, pay the rent and feed myself,” Tian said. “Forget about entertainment or any other spending.”
Many have to make even tougher decisions on simple day-to-day spending, sometimes forced to choose between the electricity bill or food. UK grocery chain Tesco Plc says shoppers are buying fewer items and trading down to cheaper own-brand versions of staples.
Just as the pandemic and its recovery proved to be k-shaped, so the next deterioration may prove similarly unequal. In the UK, a report by the Resolution Foundation think tank said that years of income stagnation have left the poorest families “brutally exposed” to the cost-of-living crunch.
Phil Storey’s recent experience as chief executive at Hammersmith & Fulham Foodbank in London is more evidence of that. With food prices up almost 9%, he’s seen an increase in demand.
“We’re seeing people who were on benefits but stable financially, people who really know how to budget, now coming to us,” Storey said. “We’re even seeing working people, those on zero-hour contracts, needing help to tide them over.”
At The Buck Inn, Marshall raises a similar concern as she tries to balance protecting her income with not driving away customers.
“The cost of goods is moving so quickly, I have to pass that on,” she said. “But at what point does my pricing become prohibitive? Does going out become so expensive that it is only for the better off?”
More stories like this are available on bloomberg.com.
