Misery loves company. The economy is no exception.
As the US stubbornly battles high inflation and prepares for the aftermath of interest rate hikes, US consumers are also facing headwinds from Europe and the UK.
Months of soaring energy prices caused in part by the war in Ukraine have taken their toll on the euro zone, and experts are predicting a grueling and brutal winter across the Atlantic Ocean.
A looming recession in Europe could sap even more energy from the U.S. economy due to a dismal stock market, lower exports, lower business from overseas and declining tourism.
“We often say that when the United States sneezes, the rest of the world catches a cold. Well, the reverse is also true,” Gregory Daco, chief economist at EY-Parthenon, said in an interview this week.
Steeper stock market swoon
US stocks have plunged this year as higher interest rates, slowing economic growth and stubborn inflation bring the country to the brink of a potential recession. While hiring has remained remarkably strong so far, companies have seen their stock values plummet as investors fear the consequences of an economic slowdown.
“Such negative views on the economy will encourage households to save what they can while rapidly rising food and energy prices further eat into their incomes,” Ross Cioffi of Moody’s Analytics wrote in an analysis. of Thursday. “As consumers spend less, companies will invest and produce less. The uncertainties surrounding supply and demand will cause companies to delay or cancel their investments.
A European recession would first be visible to Americans as another force pushing stocks lower, especially for US companies that are heavily dependent on business in Europe.
“The European economy is a big trading partner for the United States, so as the European economy deteriorates, there would be an additional impact on the American economy,” wrote Angel Talavera, economist at Oxford Economics, in an email Thursday. “There would also be financial fallout, and given the interconnectedness of financial markets, a bad recession in Europe would likely cause a lot of volatility in stock markets.”
The ongoing slump in financial markets in the UK could also rattle US markets as a former pillar of the global economy faces soaring prices and a falling currency.
UK financial markets have been reeling since the newly elected government under Prime Minister Liz Truss proposed a budget that includes tax cuts for wealthy Britons, energy subsidies and deep cuts in services social. The plan was widely condemned, including by the International Monetary Fund, as dangerous and unrealistic at a time of high inflation.
The value of the pound fell and the Bank of England intervened to stop the collapse of the pension system as bond yields soared.
“A financial crisis is always the worst-case scenario, but you can’t completely dismiss anything when you have moves of this magnitude,” Talavera wrote.
More bad news for US exporters and tourism
As Europe’s economy faces slower growth and higher inflation, US companies involved in manufacturing and selling goods to the EU are likely to be hit harder.
The strength of the US dollar has already made US products more expensive for overseas buyers, and a slowing EU economy will leave these producers with fewer willing international customers.
The weakening EU economy and the strong dollar will also reduce international tourism to the United States, posing more challenges to a sector that typically sees less activity during the winter.
“Europe is facing the brunt of the war against Ukraine on several fronts. It is not only about dealing with the consequences from a geopolitical point of view, but also the direct consequences of supply disruptions, price increases and transport disruptions in a much more direct way than anywhere elsewhere in the world,” Daco said.
US job growth slowing
Many forces will likely weaken the labor market and raise the unemployment rate as the United States heads into 2023, with Fed rate hikes topping the list.
As the Federal Reserve raises borrowing costs, corporate America will see profits decline and sales slow, making it harder to hire — and even retain — some employees. Continued high prices and the looming threat of another energy supply shock could also dampen the US labor market.
A deep decline in the EU economy could force companies with deep European operations to pull their hires faster than others and worsen the broader slowdown.
“What happens in the rest of the world ends up washing up on American shores,” Daco said.
“If the rest of the world is struggling just from an economic perspective, that reduces growth prospects for the United States and reduced growth prospects in the United States means reduced hiring, reduced investment businesses and therefore a reduction in disposable income,” he said.
