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Worried about a US or eurozone recession? 5 reasons for hope

July 6, 2022

Though murmurs about a possible recession are growing louder, there are reasons to hope US and eurozone economies might avoid the worst. The crowds at airports might be just one indication a huge downturn can be averted.

An electronic signboard in the dealing room of Hana Bank in Seoul showing a drop in share prices
Recession fears have led to a sharp drop in stock valuations this yearImage: Yonhap/picture alliance

US stocks have posted their worst first half in more than 50 years, while their European counterparts finished with their worst one since the global financial crisis in 2008. Investors fear that interest rate hikes by central banks to tame raging inflation could push the United States, the world's largest economy, and Europe into a recession.

Runaway energy and food prices are prompting central banks such as the European Central Bank and the US Federal Reserve to tighten the money taps despite their economies grappling with shocks caused by the war in Ukraine and the COVID-19 pandemic. That, most experts say, is creating a recipe for an economic downturn.

Amid all the gloom and doom on the economy, however, there are signs that a recession isn't a certainty — unlike, for example, in 2008 or after the pandemic, when it was clear that the economy was falling off a cliff and that a contraction was inevitable. And even if a recession were to come, it wouldn't cause the amount of economic pain witnessed during those recessions. Here's why.

Consumer spending remains strong

People continue to spend on goods and services despite soaring inflation and recession worries. Consumer spending, which accounts for over half of the economic activity in the eurozone and even more in the US, is witnessing a solid rebound from the pandemic lows as households replete with cash go on a shopping spree.

"Consumption is one of the pillars of growth we're looking at. It's the biggest component of GDP. The sort of pent-up demand that we're seeing from consumers is going to support the outlook," economist Rory Fennessy from Oxford Economics told DW, adding that he doesn't see the eurozone slipping into a recession just yet.

While warning of an increased probability of recession in the US, investment bank Goldman Sachs analysts said in May that strong consumer spending remained a bright spot that could help ensure a so-called soft landing for the economy — where inflation is tamed without actually causing a recession.

"Surpluses generated today by households and high-yield businesses bolster the outlook for consumer spending and business investment — and will help offset the [Fed] policy and inflation headwinds," the analysts wrote in a note to clients. "The healthy private sector financial balance widens the Fed's narrow runway for a soft landing." 

EU heading toward recession?

A savings chest worth trillions

The recovery in consumer spending has been supported by massive savings that households in the eurozone accumulated during the pandemic. People were locked down in their homes for months, resulting in them hoarding hundreds of billions of euros in cash and in bank deposits.

Thanks to generous government stimulus packages during the pandemic and household incomes holding up reasonably well in a strong job market, consumers remain flush with cash that they could potentially spend over the next two years and help keep the recession at bay.

"Savings are sort of a backbone. If consumption is going to grow, even if modestly, that's one of the reasons why," Fennessy said.

The International Monetary Fund (IMF) estimates that eurozone consumers are sitting on €1 trillion ($1.03 trillion) in pandemic savings or about 8% of total euro-area gross domestic product (GDP). US consumers have more than $2 trillion (€1.95 trillion) of excess savings.

Andrew Kenningham, chief Europe economist at Capital Economics, however, isn't pinning his hopes on excess savings preventing a recession. He argues that the savings are concentrated among high-earners who already have plenty of disposable income anyway and are less likely to spend their savings. It's the lower-income households that are being hit the most by higher energy prices, experiencing bigger drops in their real incomes. They often don't have excess savings they can draw upon to maintain their standard of living.

"So, the excess savings will help, but not as much as you might expect," Kenningham, who has a recession penciled in his forecast, told DW.

Resurgent services sector 

Sectors such as tourism, travel and hospitality are witnessing a strong rebound as COVID restrictions are lifted, as is evidenced by the chaos at airports and rising hotel prices, adding to hopes that a recession isn't a done deal yet.

High-contact services were dealt a massive blow by lockdowns and travel restrictions with people switching to buying goods from the comfort of their homes. Now, services are witnessing a resurgence thanks to pent-up demand.

"Recovery is very much underway, driven by services. We are noticing a swing from goods to services," ECB President Christine Lagarde said in June.

The services sector is an important driver of overall economic activity in advanced economies, accounting for over 70% of total output in the eurozone and about 80% in the United States.

Poster with inscription we are hiring, we are looking for you hangs in the window of an employment agency in Germany
Job vacancies remain high amid major staff shortages especially in tourism and hospitality sectorsImage: Ralph Peters/imago images

Job markets remain strong

Low unemployment rates in both the US and Europe are another factor offering hope. Strong job markets have been a major reason why household incomes have remained relatively steady despite the pandemic wrecking the economy.

The eurozone's labor market has outperformed expectations since the start of the pandemic, with the unemployment rate falling to a new record low in May. A strong recovery in tourism and hospitality is expected to continue supporting job growth even as prospects dim in the industrial sector, which is suffering from supply chain disruptions and higher energy costs.  

"It's a very unusual situation where the economy is weak, but the labor market is strong," Kenningham said. "That means that even if growth slows to zero or slightly below zero, we don't think unemployment will rise massively, and that will help to prevent any recession from being too deep."

Governments to the rescue 

The economy is being further supported by the continued relaxation of fiscal rules in the eurozone, which means governments aren't required to tighten the purse strings just yet. In fact, governments have come out with policies to cut the tax on energy,  provide cheap public transport and help businesses with loans if they're struggling with exorbitant energy costs.

Southern European economies, which are already seeing a jump in borrowing costs following the ECB's hawkish turn, are likely to benefit from the billions in funds being disbursed as part of the NextGenerationEU economic recovery package.

The core European economies like Germany — with relatively low levels of debt as a percentage of GDP — still have a lot of spending power to help prevent a recession, experts say.

Kenningham says, unlike the 2008 recession, which was caused by a credit crunch and collapse in asset prices, the recession this time around would be driven by a fall in real incomes of households because of the increase in energy prices.

"I don't think it will be as bad as 2008," Kenningham said. "There is not likely to be a credit crunch because the banks are in quite a good shape and asset prices are not likely to slump. We're not expecting a property price collapse, which can also cause a bigger downturn."

Edited by: Uwe Hessler

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85