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Has the recession really started? A comparison between Europe and the United States

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Has the recession really started?  A comparison between Europe and the United States

The Eurozone entered technical recession given that it closed the first quarter of the year with a negative growth of 0.1% (GDP) compared to what was achieved in the last quarter of 2022, when it already fell by 0.1%.
And so Europe slipped into the so-called technical recession, but what does that mean? Will the ECB raise rates again now? And above all, it will officially enter a recession, and what about the United States?

Difference between technical and effective recession

Let’s clear up any doubts right away: if an economy enters a technical recession, it is not certain that it will fall into a more severe recession.

By convention it is called technical recession the situation in which an economy experiences a contraction in its gross domestic product (GDP) for two consecutive quarters.
Il PIL remember to be the most important and most monitored by economists to assess the economic activity of a country and represents the value of all goods and services produced during a given period. Here is that if the value of the GDP decreases for two consecutive quartersthere is talk of a technical recession.

Ultimately, this type of recession can be considered “technical” because it is based only on the objective criterion given by the contraction of GDP, but this could be transitory and not reflect an effective sustained deterioration of the economy as a whole.

On the contrary, the actual recession it represents the actual recession, a broader and more serious situation that can be defined as a phase of slowdown in economic activity. Thus a recession is a much more serious and persistent situation, which could have long-term effects on employment, investment, production, as well as the general well-being of the economy and the population.

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As we said, however, even if Europe has entered a technical recession it is not certain that a much deeper recession will actually occur. From this point of view, in fact, it has happened many times in history that an economy slipped into a technical recession and then recorded a contraction for two consecutive quarters, to then recover ground by recovering quickly from the temporary stagnation.

Comparison between Europe and the United States

If on the one hand the European economy Europe is slowly slowing down, on the contrary the United States remains resilientwith the central banks (Fed and ECB) which in any case seem to be still far from a rate cut.

In Europa, “household consumption has been hit hard by high prices and rising interest rates”comments Andrew Kenningham, chief European economist at Capital Economics, who also signals that a sharp drop in government spending was another key driver of the decline in GDP earlier this year. Indeed, growth in Europe was penalized by the GDP of Ireland and Germany which dragged the region into a technical recession.

Obviously, this stalemate and slowdown does nothing but complicate the work of central bankers who will meet next week (Wednesday the Fed and Thursday the ECB) to evaluate the next direction of interest rates.

In fact, the objective remains that of bringing inflation back towards the 2% objective and we are currently still more than three times this objective, but at the same time one cannot fail to consider that a further rate hike could further damage the economy. “In this context, it is unlikely that we will see a rate cut before 2024,” comments Anima Sgr.

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“We think GDP is likely to contract again in as the effects of monetary policy tightening continue to play out”comments Kenningham of Capital Economics.

The United States in the lead

In any case, Europe’s economy still lags behind the US economy. US GDP grew 1.3% year-on-year in the first quartera figure that beat analysts’ expectations.

Also for this reason, in the last few days Goldman Sachs Group has revised its estimates on the possibility of a recession in the United States in the next 12 months. Now the probability of a recession in the US is 25% and this thanks to the easing of stress in the banking sector, as well as due to the agreement on the national debt ceiling. Let’s keep in mind that after the various bank failures in March, this probability had risen to 35%, alarming investors.

Nonetheless, the turbulence in the banking sector could have an impact on the real economy through the contraction of the credit channel. This thesis could be confirmed “by the recent tightening of standards for the granting of loans to households and businesses and the marked weakening of demand, in the USA and in the Euro Area”, comment the analysts of Soul Sgr.
However, “the extent of these phenomena on economic activity, however, should not be such as to translate into a systemic crisis”.

“Historically, falling demand for loans and tightening credit standards occur just months before or during a recession.” Still, US economic growth for the first quarter of this year has been revised upwards, with the US labor market remaining strong and corporate profits still solid.

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In any case, the climate on the markets is uncertain and therefore “we need to be patient, diversify and be ready to change pace as soon as the wind has taken a clear direction”.

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