Shrinking businesses ring recession alarm in major economies

Recession or stagflation fears have been in the air for months. Now they are reflected in numbers, showing growth shrinking in the USA, business profit stagnating in the UK and factory output falling in China.

The United States shrank in two consecutive quarters till June, meeting the commonly used definition of recession, with a series of interest rate hikes failing to hold back inflation from surging to four-decade high.

The International Monetary Fund last week forecast the British economy would see the weakest growth of any major economy other than Russia next year. With inflation hitting 40-year high, the UK's central bank may announce its biggest rise in interest rate in decades later this week.

Talk of "stagflation" – combination of stagnant growth and rampant inflation – is growing louder in the US, while economists say Britain is barrelling towards a period of stagflation, with growth expected to slow to a crawl next year, forecasts Business Insider.

Soaring energy prices, rising interest rates, tax hikes and Brexit – all are battering the UK economy.

For policymakers in better-performing European economies, Britain's current situation sends a warning of what could be coming if things go wrong.

Inflation, which remains at the heart of the UK's woes, is likely to keep rising further this year, putting leaders under pressure over the bleak outlook.

"All your bills, every month, they're going up and up and up," said Rishi Sunak, who led the UK's economy ministry over the last three years, said in a television debate. Foreign Secretary Liz Truss, said the UK faces "the worst economic crisis in a generation". Both of them are potential successors of Boris Johnson as UK prime minister.

UK businesses to see '0' growth

Meanwhile, British businesses have been experiencing a decline in consumer demand due to surging cost of living; they do not expect any growth over the next three months, according to the monthly survey of the Confederation of British Industry (CBI).  

"As firms and consumers continue to be buffeted by rising prices, private-sector activity has slowed to a near standstill," CBI economist Alpesh Paleja said to Reuters on Sunday.

Manufacturers expect current slow growth to persist, while consumer services and retail businesses see a fall in sales, and business services expect growth to slow, the CBI said.

"This is unsurprising, given that strong inflation has been pushing real wages down sharply, and consumer confidence is at an all-time low," it added.

In the USA, the Federal Reserve is walking a tightrope in its commitment to get inflation back to 2% from over 9% now and planning more rate hikes towards the end of the year.  A Bank of America forecast warned the US economy would go into recession in the second half of this year.

It doubts about the Fed's ability to stick to a soft landing in the economy.

China's factory activity contracts

China, the world's second largest economy, is facing a different problem; fresh Covid-19 flare-ups forced the country's major cities under lockdowns which cut factory activity drastically in July, reversing the Covid recovery.

Added to it is the darkening global outlook which weighed on demand, pushing the official manufacturing purchasing managers' index (PMI) below the 50-point mark that separates contraction from growth and the lowest in three months, the National Bureau of Statistics (NBS) said, reports Reuters on Sunday.

"The level of economic prosperity in China has fallen, the foundation for recovery still needs consolidation," NBS senior statistician Zhao Qinghe said in a statement on the NBS website.

Continued contraction in the energy-intensive industries, such as petrol, coking coal and ferrous metals, contributed most to pulling down the July manufacturing PMI, he said.

Chinese investors are parking excess liquidity in safe bets within the financial system, including the US dollar, instead of letting it flow to the real economy, according to a Bloomberg report.

The cost of yuan funding has fallen for three months against the dollar in the offshore forward market, reflecting higher demand for the dollar.

Chinese cash is also heading for the US dollar, which is already hovering near 20-year highs, helped by higher rates.

Given the Federal Reserve's much more aggressive rate hikes compared to China's accommodative policy, the dollar poses a more attractive option for investors compared to the yuan. 

Recession alarms for Eurozone too

Amid a severe gas crisis, which is feared to grow its worst in the coming winter with Russia reducing pipeline gas, outlook for Europe does not sound good, too.

There are fears Germany – home to the EU's largest economy – could slump into recession.

According to official figures, Eurozone inflation soared to 8.6% last month – up from 8.1% in June – while earlier this month, the struggling euro hit parity against the US dollar for the first time in more than 20 years

EU critic and Frexiteer Eric Noirez warned in an interview with Express.co.uk: "The situation in the Eurozone is dramatic, not to say desperate.

"We have record inflation, a record trade deficit, record national debts, continuing deindustrialisation, growth still at half-mast and, finally, an increasing loss of confidence of investors and economic actors."