Jakarta, CNBC Indonesia – The global economy is getting ‘dark’, the recession seems to be just a matter of time. The release of economic data from the United States (US) showed business activity experienced the first contraction in the last two years. The same is also experiencing the same thing. As a result, the risk of a global recession increases. The issue of world recession made risky assets difficult to strengthen, the Composite Stock Price Index (JCI) which repeatedly scored all-time highs above 7,200 turned down, until it touched the level of 6,500, Rupiah is also struggling to strengthen, and is currently still near Rp 15,000/US$.S&P Global on Friday (22/7/2022) reported the initial release of the July composite purchasing managers’ index (CPI) fell to 47.5 from the previous 52,
The PMI uses the number 50 as there threshold. Below it means contraction, while above it is so expansion. Business activity consists of two sectors, manufacturing and services. The manufacturing sector continued to expand by 52.3, down from the previous 52.7. Meanwhile, the service sector declined to 47, from the previous 52.7.
“The early July PMI releases show a worrying slump. Excluding the lockdown period due to the Covid-19 pandemic, output has fallen the most since 2009, during the global financial crisis,” said Chris Williamson, S&P Global Chief Business Economist. , (25/7/2022).In the euro zone, the composite PMI also contracted due to the slump in the manufacturing sector. The July composite PMI stood at 49.4, down from last month’s 52, this month’s figure was the lowest since February 2021.The United States is the country with the largest economy in the world, the euro zone consisting of 19 countries is in second place. Several economic giants joined in the euro zone namely Germany, France and Italy. When the United States and the euro zone are in recession, the world is in danger of experiencing the same thing. Moreover, China’s economy is also experiencing a slowdown due to the continued implementation of the lockdown, although only in some areas.
A Reuters poll showed a 40% probability of the United States experiencing a recession in the next 12 months, and a 50% probability in the next two years.
America “addicted” to low interest rates, recession next year?
Jakarta, CNBC Indonesia – Since the 2008 global financial crisis, the United States (US) economy has been supported by loose monetary policies. For approximately 14 years since the global financial crisis, interest rates in the US have often been in the range of 0% – 0.25%.
When the economy slows down and even goes into a recession, the US central bank (The Fed) will lower interest rates to 0% – 0.25%. When the economy improves, interest rates will begin to increase, or to the normalization phase of monetary policy. The Fed is currently in that phase after the US economy collapsed due to the coronavirus disease (Covid-19) pandemic. In the last month, the Fed has raised interest rates by 25 basis points to 0.25% – 0.5%.
In addition, the Fed plans to be more aggressive in raising interest rates this year in order to reduce inflation.
The latest Reuters survey of 102 economists in the April 4-8 period showed 85 people projected a 50 basis point rate hike in May. In addition, 56 people also predict the Fed will take the same steps in June. If the predictions are accurate, it would be the first time the Fed has raised rates back-to-back 50 basis points since 1994. James Knightley, chief economist at ING even projected a 50 basis point gain in three straight meetings. “Hearing the comments from Fed officials and the continued inflationary pressures on the economy, we believe the Fed will raise interest rates 50 basis points in May, June and July,” Knightley said. ). However, the last time the Fed raised interest rates up to 4 times in 2018, the US economy experienced a recession in 2020, although one of the main factors was the coronavirus disease (Covid-19) pandemic.
Interestingly, before the recession, the US Treasury bond yields experienced an inversion in 2019.
Under normal circumstances, short-term bond yields will be lower than long-term bonds. But if investors see that in the short term the economy will deteriorate and even experience a recession, then the risk premium demanded will be higher. An inversion occurs when the yield of short tenor Treasury bonds is higher than that of long-term bonds. Now the inversion between the 2-year and 10-year Treasury yields occurred again on March 31, just as the Fed started to raise interest rates. The bad news is that almost every time an inversion occurs, the United States will experience a recession.
Based on research from the San Francisco Fed released in 2018, it shows that since 1955 when a yield inversion occurred, it would be followed by a recession within 6 to 24 months afterward. During that period, the Treasury yield inversion only once did not trigger a recession (false signal). Economists surveyed by Reuters in the April 4 – 8 period also predict the US economy will experience a recession next year, with a probability of 40%.