The U.S. economy is very likely on a path to shrink this year and next, a Federal Reserve Bank of New York report said on Friday.
According to how the New York Fed models the economy’s path, the report said that “the chances of a hard landing…as occurred during the 1990 recession are about 80%,” while the probability of a “soft landing,” in which gross domestic product essentially remains positive over the next 10 quarters, is 10%.
The report said the New York Fed’s model predicts a 0.6% contraction for this year and a 0.5% downturn in 2023, with inflation remaining very elevated this year before waning next year and later.
The outlook is more pessimistic than what the model predicted in March. New York Fed economists tied the change to surging inflation and a more aggressive monetary policy response by the Fed than previously expected.
The New York Fed’s report followed the central bank on Wednesday raising its short-term interest rate target by three quarters of a percentage point, the most aggressive increase in short-term borrowing costs since 1994.
The move was larger than what Fed officials signaled ahead of this week’s Federal Open Market Committee meeting. After the meeting, Fed Chairman
said another 50 or 75 basis point rate increase was likely at the July FOMC meeting, as the central bank moves aggressively to try to ratchet down the worst inflation readings in four decades.
Fed officials have said lowering inflation closer to their 2% target is now the central bank’s main mission, and Mr. Powell said Wednesday he doesn’t believe a downturn is a certain outcome of the Fed raising interest rates. The Fed is “not trying to induce a recession,” he said.
Forecasts released by the Fed as part of its policy meeting projected a modest rise in unemployment in the wake of the expected path of rate rises, but didn’t point to a downturn.
But many outside observers, including former central bankers, believe the actions the Fed must take will contribute to a recession.
“I don’t expect the recession to be very near term,” former New York Fed leader
said on Tuesday at a Wall Street Journal event. “I think this is mostly a 2023-24 story, in terms of a hard landing. But I do continue to think that a hard landing is very likely, and obviously the more persistent the inflation is, the higher inflation is for longer and that makes the hard landing risk go up.”
The New York Fed cautioned in its report that its model’s outlook isn’t an official forecast of the central bank. The most recent recession was triggered by the onset of the pandemic and was unusually short, between February and April 2020. The prior recession occurred between December 2007 and April 2009 due to the collapse of financial markets.
A recession is widely understood as two consecutive quarters of negative economic growth, though the National Bureau of Economic Research, which is responsible for marking expansions and downturns, says a recession “involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Write to Michael S. Derby at firstname.lastname@example.org
Charting the Global Economy: Factories Slow Down From US to Asia – BNN
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Manufacturing from the US to Asia is very much in a slowdown as factories continue to struggle with supply snarls, labor shortages and elevated materials costs.
A measure of US manufacturing activity weakened in June to a two-year low, and several regional Federal Reserve surveys indicated business activity shrank. Factory purchasing managers’ gauges across Asia eased, with South Korea, Thailand and India among those showing the biggest declines, according to S&P Global.
Similar indexes in Poland, Spain and Italy also showed weaker activity compared to May.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
Consumer spending fell in May for the first time this year and prior months were revised lower, suggesting an economy on somewhat weaker footing than previously thought amid rapid inflation and Fed interest-rate hikes.
Regional Fed manufacturing surveys have taken on a grimmer tone, with four of five indicating business activity shrank in June. Separately, a measure of overall manufacturing slid to a two-year low as new orders contracted, restrained by lingering supply constraints and some softening in demand.
The pandemic housing boom is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high.
Confidence in the euro-area economy slipped as households become more pessimistic amid fears a Russian energy cutoff will spark a recession. At the same time, they’re less worried about inflation than they were a month ago, though there’s a split between core and peripheral euro-area countries.
After suffering from unprecedented shocks in recent years, the UK is succumbing to more intractable problems marked by plodding growth, surging inflation and a series of damaging strikes.
China’s economy showed some improvement in June as Covid restrictions were gradually eased, although the recovery remains muted. That’s the outlook based on Bloomberg’s aggregate index of eight early indicators for this month. The overall gauge returned to the neutral level after deteriorating for two straight months.
Japan’s factory output shrank at the fastest pace since the height of the pandemic as the lagged impact of China’s virus lockdowns continued to disrupt supply chains and economic activity in the region. The weakness in manufacturing extended across Asia, particularly in South Korea, Thailand, India and Taiwan.
Colombia’s central bank delivered its biggest interest rate increase in over two decades. Policy makers are bracing for another spike in annual inflation that’s already above 9%.
Two years after Argentina emerged from its latest default, a debt crisis in brewing once again. This time, the immediate trouble is in the local bond market, where creditors have become reluctant to roll over maturing government bonds.
Zambia’s inflation rate dropped below 10% for the first time in almost three years in June, bucking a global trend of record consumer-price growth. Optimism over the nation’s economy since the election of Hakainde Hichilema as president in August, a potential debt restructuring and a $1.4 billion bailout package from the International Monetary Fund has seen a rally in the local currency, which has helped contain prices.
Differences in underlying inflation trends call for different policy outlooks among the world’s top central banks, according to Bloomberg Economics. The Fed will have to go well into restrictive territory, the Bank of England may go a little above neutral and the European Central Bank might not even get that far.
©2022 Bloomberg L.P.
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Minister Of The Economy Franz Fayot On Luxembourg’s Transition Towards A Green Economy – Forbes
Just last week, Luxembourg’s Minister of the Economy, Franz Fayot, came to the cities of Toronto and Montreal as part of an economic mission organized by the Luxembourg Chamber of Commerce in close cooperation with the Ministry of the Economy. I had the opportunity to sit down with Minister Fayot at the InterContinental Toronto Centre, and get some insights into the Grand-Duchy’s economic transition towards sustainability.
A transitioning economy
With up to one-third of its GDP related to the finance sector, Luxembourg’s economy is widely dominated by the financial sector. However, the past 20 years have been characterized by a push for economic diversification, and increased transparency and regulations following the financial crisis, said Minister Fayot.
“What we are trying to do is diversify [the economy] even more into new sectors to make us less dependent on the financial sector and adaptable to new circumstances,” he said. “We are also more and more developing a green finance sustainable finance sector, which is doing very well.”
A green state responsibility
Minister Fayot, whose guiding principles are a strong welfare state and sustainability, firmly believes that the government must assume its pivotal role in shifting the economy towards sustainability — “both in terms of environmental sustainability, but also social sustainability,” he added.
In June 2020, an international consultation was launched to gather strategic spatial planning project ideas considering the climate-related challenges and social issues, and support for the country’s ecological transition towards a zero-carbon territory by 2050.
“We need to understand that we have to help businesses innovate, and invest in the future,” said Minister Fayot.
A rising startup ecosystem
Luxembourg has seen a steady growth in startups over the past decade.
Earlier this year, the Ministry of the Economy launched a strategic initiative aimed at providing a thorough understanding of the startup ecosystem based on data analysis and interviews with key stakeholders.
Luxinnovation, the national innovation agency, identified over 500 active startups offering innovative digital and data-driven solutions in its latest mapping.
These assessments will also provide relevant comparisons with international markets, and aim to identify the necessary next steps for development opportunities in the upcoming years.
“Our innovation agency is there to guide startups, but also other more established businesses, to get access to grants,” explained Minister Fayot. “We have a state aid framework in Europe which we have to comply with, but the main message is that there is an obvious need to co-finance innovation, particularly in times when we are in this transition towards a more green economy.”
Going above the limits of territory
Surrounded by Belgium, France and Germany, Luxembourg is one of the smallest countries in the world — slightly smaller than Rhode Island. Yet, despite its dependence on its neighboring countries’ energy supplies, it is making continuous efforts to increase its share of renewable energy by also investing in projects across its borders, said Minister Fayot.
“We don’t have that much sun in Luxembourg, and we don’t have an unlimited space to build wind power,” he said. “It’s a bit of a limiting factor, but it shouldn’t excuse anything.”
“We are investing a lot into energy efficiency,” he added. “We are trying to get people to e-mobility and pushing for geothermal heating and energy in new constructions.”
A growing space sector
Luxembourg might not be the first to come to mind when we think of space, but, the country owns one of the world-leading satellite operators, and is increasing its investment into space resources.
“The SpaceResources.lu is an initiative that we launched about six years ago, and it is very much focused on the space resources segment of the space industry,” he said. “We are not launching anything in space out of Luxembourg, but focusing on services like space traffic management.”
As part of the economic mission, a group of space companies participated in a distinctive program set up by the Luxembourg Space Agency in collaboration with the Canadian Space Agency. This included on-site company visits, workshops and B2B opportunities that led to the signing of a Memorandum of Understanding between the two national space agencies.
Stephanie Ricci contributed to this story.
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