Seeking Shelter From The Next Economic “Hurricane” By Investing.com

by Jeffrey Smith

Investing.com – Fears of a recession are growing across the advanced economic world. The risks vary from country to country, but a group of them will certainly encounter more difficulties than others.

Spoiler: Despite Jamie Dimon’s references to the “hurricane” and “Elon Musk feeling really bad” about the economy, it won’t be the US that will have more problems.

Both deans of US capitalism caused chills in financial markets last week with their comments, and for good reason. Dimon, as CEO of the nation’s largest bank, likely has more and better access to data on the health of American families and businesses than anyone else in the United States.

“This hurricane is on the road, heading our way,” Dimon added, adding that it was hard to tell if it was a “minor hurricane or superstorm Sandy,” the storm that swept through New York in 2012.

“You’d better get ready,” he summed up, after reminding his audience that JPMorgan (NYSE:) was preparing for an “unhealthy environment” and “bad results.” Put simply, this means a significant increase in the provision for bad debts on balance sheets for the second quarter, as well as a sharp decrease in commissions on new loans as demand for home and auto loans is crushed by higher interest rates.

The former CEO of Goldman Sachs (NYSE: NYSE:) was similarly bleak last month, claiming on CBS’ Face the Nation that the potential for a recession had increased significantly as central banks halted excessive stimulus policies put in place to support the economy throughout the pandemic.

Dimon is fond of shielding his forecasts from disaster, and he often cites the strength of household budgets as one reason the United States should not head into recession now. US household debt, measured in relation to GDP, has fallen from nearly 100% in 2008 to less than 80% at the end of last year. (Interestingly, she has a more relaxed outlook, indicating that a recession in the US at least is not “imminent.”)

However, that only tells half the story. Data from the Bank for International Settlements suggests that US companies are entering a cycle of higher interest rates much more than before, as a result of a decade when debt financing has been consistently cheaper than raising cash. Corporate debt, which was less than 66% of GDP 10 years ago, now exceeds 81%.

Of course, federal debt has also risen relentlessly over the past decade, due to persistent budget deficits. This indicates a greater risk to growth if interest rates continue to rise in line with expectations.

In other countries, the vulnerability to recession is likely to be greater, especially in Europe, where the political imperative to punish Russia for its invasion of Ukraine has placed artificial—but acute—pressure on energy prices spreading rapidly through the economy. He has already predicted that the British economy will contract when the next rise in regulated electricity bills comes in October. Meanwhile, the European Central Bank will release a new set of economic forecasts at its meeting on Thursday, which are sure to show a significant downward adjustment to growth for the year.

Then there is China, another traumatized, if not artificial, country that has a significant human component. PMIs for and for China have spent most of the past three months in deflation as lockdowns tried to spare industrial production but made no concessions to consumers. As Shanghai and Beijing are now beginning to reopen to businesses, officials have made clear that any new outbreaks — possibly due to newer and more transmissible variants of Covid-19 — will meet exactly the same zero-tolerance response.

However, the countries most at risk are – as always – those that depend on others for their food and energy supplies. With oil at $120 a barrel, it hurts to be a net importer like oil or oil, especially if international tourism is still not generating the amount of money it was making before the pandemic. For countries like Pakistan, Egypt and Tunisia, which depend on Russia and Ukraine for their grain imports as well as being net importers of oil, the tension is even greater.

It may be an exaggeration to talk about a global recession – things rarely go so badly around the world that they don’t – but the likelihood that individual countries, or groups of countries with specific risk characteristics, will enter a recession has increased significantly.

On Tuesday, when publishing another cut in his growth forecast for 2022, he warned, “Even if a global recession is averted, the pain of stagflation could last for several years.” According to the bank, the problem of inflation is so widespread that the per capita income of 40% of people in developing countries will be below pre-Covid levels this year.

The worst could still be avoided, but “very bad sentiment” about the economy is likely to remain for some time.