Why is it dangerous and how can it affect Latin America

Technical slack
Stock markets are waiting for what might happen in the coming months. get pictures

The world’s largest economy is in the midst of a storm.

Its growth suffered two consecutive quarters of economic downturn, a milestone classified as a “technological recession”, although it is considered a recession in many countries.

This is not the case in the US, where authorities are waiting for other data to confirm whether the economy has indeed entered recession, a scenario that many US experts have defined as “a significant decline in economic activity that extends throughout the economy and lasts more than a few Months.

The main fact released this Thursday is that The country’s annual GDP fell 0.9% in the second quarteradding to a decline of 1.6% in the first quarter.

Thus, with these numbers in red, expectations that the country will withstand the downturn despite the current economic slowdown have been erased in one fell swoop.

Business investment, housing and construction fell, consumer spending slowed and incomes (adjusted for inflation) declined, according to data from the US Department of Commerce.

These marks appear amid standard inflation (9.1%the largest increase in 40 years), the rapid increase in interest rates and declining economic growth, a combination that remains worrisome.

Recession
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“It doesn’t look like a recession to me.”

To deal with headwinds, the Federal Reserve (the equivalent of the central bank in other countries) has been trying to cool the economy in an effort to control inflation, and the White House has argued that the current slowdown is part of an inevitable transition toward a more stable period of growth.

US President Joe Biden on Thursday dismissed claims that the country is in recession, after announcing the economic contraction for the second consecutive quarter.

Recession
“It doesn’t look like a recession to me,” said US President Joe Biden. get pictures

Biden noted that there is strong job growth and a recovery in manufacturing, adding: “It doesn’t look like a recession to me.«.

After historic economic growth last year, and the restoration of all the private sector jobs lost during the pandemic crisis, it is not surprising that the economy is slowing.

The president’s reaction adds to the statements of Treasury Secretary Janet Yellen, who a few days ago highlighted the good performance of the labor market, and Federal Reserve Chairman, Jerome Powell, who announced after he announced on Wednesday that a 0.75 basis point increase in interest rates, tried to clear the clouds In sight.

“I don’t think the United States is currently in a recession. The reason is that there are a lot of areas of the economy that are doing very well.”

Recession
Jerome Powell, the Federal Reserve Chairman, cautioned that he does not believe the country is in a recession. get pictures

The debate over whether the United States is in a recession or not is a topic that generates heated debate.

“The last time we saw inflation this high, in the 1980s, we had a very deep recession,” Laura Feldkamp, ​​professor of finance at Columbia University Business School, told the BBC.

He added that the country learned from that experience, raising hopes of a milder recession.

But one of economists’ biggest concerns is that aggressive moves by the Federal Reserve (which has been raising interest rates with the aim of curbing inflation) will affect growth and cause a recession scenario.

Markets, politicians, and economists have all been closely following the development of the labor market, a key element in highlighting the potential for the arrival of a dreaded recessionary wave. Until now The unemployment level remained at 3.6%..

Where is the danger?

Harvard professor Jeffrey Frankel has argued that “the odds of a recession are much higher than in any other year.”

He told the BBC that the strongest pressure was coming from the external front. The slowdown in China and Europe, which have been hit hard by rising energy prices from the war in Ukraine, add to the risks.

Recession
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“Many other countries have more serious problems… they are very likely to be affected and can extend usFrankel noted.

Analysts point out that the main danger of the current scenario, other than the technical discussion about what a recession is, is that it is a kind of The effect of infection between economies.

Whether it’s because Europe or China slows down and ends up affecting the United States, or because the United States – in the opposite direction – is sinking into stagnation waters and affecting others, the close interdependence of economies is causing the ups and downs on one side of the planet being magnified towards the rest. .

Markets, anticipating a possible global recession, were dumping risky investments to hedge against possible heavy rain or cut futures contracts on some commodities.

In the midst of rapidly expanding stagflation (high inflation with low growth) worldwide, some view the threat of a recession as just around the corner.

“Deepening stagflation and the risks of #recession in flashing red”Prominent economist Mohamed El-Erian posted on Twitter.

Some experts are more cautious about the idea of ​​recession contagion from the United States to other parts of the world.

“So far We don’t expect US GDP to slow to the point where it risks creating a chain reaction.”Kaelen Birch, an economist at the Economist Intelligence Unit research centre, told BBC Mundo.

He added that “recession risks are high for a number of countries, especially in Europe.”

Recession
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But these risks are “mainly due to the economic consequences of The war in Ukraine And to a lesser extent, the commercial and industrial disruptions resulting from the coronavirus lockdowns in China.”

Birch argued that much slower growth in the US would translate into lower import demand and lower foreign investment, but that “this is likely to be a drag on growth, rather than a serious risk of recession in most countries.”

How could it affect Latin America?

From his last point of view The strengthening of the US dollar poses risks to many economies.

“This is especially true for Latin America, which has strong trade links with the United States.”

In this sense, he said, the weak economic outlook for the United States increased the demand for the dollar as a safe haven, which further strengthened the currency.

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In the case of Latin American countries heavily indebted to the US currency, a stronger dollar and higher interest rates will “achieve It’s hard to resist interest payments on debt »Explanation of the economist.

For Jose Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth (IDIC) in Mexico, the most worrying thing about the US economic scenario is weak domestic consumption, as well as private investment.

In any case, the economist said in an interview with BBC Mundo, “there is a chiaroscuro” in the current context, given that industrial production continues to advance.

However, with the weakening of the US economy, the effects are reaching trading partners such as China, Mexico, Canada and the European Union, due to the high level of trade.

“Expansion wave affected by foreign trade”De la Cruz commented.

Another channel for contagion or “transmission factor” abroad is the weakening of money flows from the United States.

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But at the same time, the slowdown is increasing the flow of capital from abroad into the United States, as investors seek to protect themselves from storms.

In this sense, Latin America is quite vulnerable to capital flight towards the world’s leading economy.

On the other hand, if the United States continues to slow down, so It will affect the exports that Latin American countries send to that marketwhich reduces an important source of income.

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We must add to this, as the economist said, that the price of raw materials has fallen, which affects the fall in income.

Looking at the longer term, Jose Luis de la Cruz warned that if the United States falls into a recession, “this opens the door for China in Latin America to buy more goods” and strengthen its presence in the region.

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