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  • 🧠 It's not THIS recession you need to worry about...

🧠 It's not THIS recession you need to worry about...

actually... are you even worried?

Author

Tim Vollans
September 22, 2023 • Estimated Reading Time: 7 minutes

With so much talk of recessions, here’s our take on what’s happening right now in the economy

And we look at whether recessions are even worth worrying about…

🧠 The Big Brain
Recession Or Bust Boom?

One hot topic in markets right now is whether the US economy is heading for recession or can simply keep on expanding. Growth has been fuelled by massive amounts of government spending and that doesn’t seem likely to stop…

For every action, there’s, a reaction. Not necessarily equal and opposite but a reaction nonetheless.

The recent move higher in US Government bond yields is driven by this fiscal largesse:

Now, there's a school of thought that higher rates will become a massive drag on the economy in coming months. That’s the entire point of central banks hiking rates after all.

The resumption of student loan payments is also expected to dampen consumer spending and higher mortgage rates are already having an impact on activity in the US housing market:

Piper Sandler

So higher rates are sort of working to slow activity there. However, that’s not the case across the board. Loads of companies locked in their debt at much lower rates during the pandemic so they're not really under the same pressure to go out and borrow more now.

Likewise there's no panic about repayment from lenders, because company balance sheets are generally in much better health than they were before Covid hit.

The same is true for many US households, who locked in fixed rate mortgages over longer terms at those same low rates.

Amongst all of the doom and gloom, and highest yields since 2007!!! headlines, you look around and ask…

Where’s the pain?

The labour market’s supposed to be weakening. No doubt it’s not as strong as it was, but it’s a long way from weak…

So, ask again... Where’s the pain?

⚡ The Spark
Sharpest fall in employment since 2009

Ah there it is! At least, that’s what the survey (UK PMI) says…

“A major concern in the inflation outlook has been wage growth, but with the survey now signalling the sharpest fall in employment since 2009, wage bargaining power is being eroded rapidly.

“With the Bank of England having had sight of the survey data prior to its latest policy decision, the worrying signals from the survey of heightened recession risk and cooling inflationary pressures are likely to have added to calls to halt rate hikes.”

But it might not be as dire as the headline suggests…

Survey respondents mostly suggested that budget constraints had encouraged the non-replacement of voluntary leavers & restructuring efforts. However, many still noted resilient demand for graduates, apprentices and entry level staff.

Perhaps more normalisation than outright weakness. The big question now is if global demand will pick up again.

The lead headline for the European PMI?

“Eurozone companies see sharpest drop in new orders for almost three years”

Michael Omg GIF by Klar Geht Das!

đź’ˇ The Lightbulb
Recessions are… good

WHAT?! Are you on crack mate?

Bear with me. The whole point of The Lightbulb is to challenge conventional ways of thinking, and focus on the vast grey areas between black and white.

See, analysts & economists tend to focus heavily on the prospect of recessions. Spoiler: They’re always seen as bad.

But recessions come in a million different varieties. OK. Maybe not a million, but loads. Deutsche Bank have done some amazing research looking at the history (and future) of recessions… (premium subs, DM me if you missed the full piece)

The conclusion is surprising at first, but when you stop and think, it sort of makes sense…

First up, they think the future will be more boom/bust:

All-in-all, we think the most likely future is one of more frequent recessions and more boom-bust cycles.

Ultimately, the long expansions of the last 40 years are likely to prove rarer moving forward.

The Great Moderation is over.

Blackrock

That may seem undesirable on the face of it, but history tells us that recessions aren’t necessarily bad for growth in the long term.

Indeed, looking at our sample of G7 countries, it is the US that has had the most frequent recessions, but has stronger economic growth than its peers.

That seems counterintuitive, but recessions are a key part of the business cycle. Living with this cruel fact is precisely why the US tends to do better…

In part, this is thanks to a greater acceptance of creative destruction and economic regeneration. That’s understandably painful as it takes place, but by enabling a more efficient allocation of resources, it can set the stage for stronger growth over the long term.

So recessions shouldn’t be actively avoided:

trying to avoid a recession is not necessarily a cost-free move, particularly if it causes a build-up of leverage and inefficiencies that become more widespread across the economy.

Furthermore, if trying to extend the cycle is creating a growing mountain of debt, that risks laying the foundations for an even bigger recession when it does arrive.

If you want some doom porn, read the last line!

There are never any guarantees. Economies are complex, unpredictable beasts, just like the humans that comprise them.

Recessions will occur at some point. They always do. The slowdown will be painful for some (but not for all) and the darkest night always comes just before the dawn the strongest growth in modern economic history…

The strongest growth in modern economic history has tended to come in periods where business cycles have been allowed to evolve more naturally and by definition roll over more frequently.

Deutsche Bank

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