One hears more and more often that the major economies of this world are on the verge of a recession. But what is that actually? In economic terms, a recession is when the economy is in recession. More precisely: a recession occurs when the gross domestic product (GDP) does not grow in two consecutive quarters compared to the respective quarters of the previous year, or even decreases. Even if the US, for example, is not yet officially in a recession, there are increasing signs of it.
Gloomy economic outlook
The ZEW index, a barometer of economic development in Germany over the next six months, fell 93.6 to minus 39.3 points in March. This is also the steepest drop since the expert survey began in December 1991.
A recession is increasingly likely. The war in Ukraine and the sanctions against Russia considerably worsen Germany’s economic prospects. Collapsed economic expectations go hand in hand with extremely rising inflation expectations. Therefore, experts assume stagflation in the coming months. The deteriorating outlook affects virtually all sectors of the German economy, but above all energy-intensive areas and the financial sector.
ZEW President Prof. Achim Wambach, source: ZEW
According to the Mannheim institute, expectations have dropped sharply and are now at a level similar to that of the summer of 2019. The war in Ukraine and the sanctions against Russia in particular pose major challenges for many companies. Problems in the supply chains and the increase in the prices of raw materials seem to be exacerbating the current situation.
Zero tolerance policy – Shenzhen is closing
As if the current situation wasn’t inflationary enough, now there’s also the fact that China has started another lockdown on Shenzhen. The explosive thing: There are numerous production sites of big tech companies in Shenzhen. At the beginning of the week, for example, foxconn, Apple’s largest supplier, to stop all production. The lockdown will initially last a week. There is no end in sight yet. This is likely to put further pressure on already strained supply chains. As a result, there could be more supply bottlenecks, especially in the high-tech and electronics sectors. All in all, not exactly to alleviate inflation.
Recession: Fed and ECB in deadlock
The fact that growth prospects are massively deteriorating is becoming particularly clear in the bond market (bond market). There is more and more talk of a flattening of the yield curve. What does that mean? Here’s a brief explanation: Figure 1 shows the difference (spread) between the 10-year and 2-year US Treasury bills. When this curve falls, the yield curve is said to flatten as interest rates on shorter-dated bonds rise. A drop below the black line implies an inverted yield curve. This has always been a reliable indicator of a recession in the past. As can be easily seen, the US yield curve has fallen sharply in recent weeks and is not far from inverting.
Normally, during a recession, a central bank cuts interest rates, which essentially means that money flows into the market. The problem: The key interest rate in the US is already at a historically low level (see Figure 2). How far the Fed can raise interest rates in such an environment should be very exciting.
Both the Fed and the ECB seem to have maneuvered themselves to a dead end. Gunther Schnabl, Professor of Economic Policy and International Economic Relations at the University of Leipzig and Director of the Institute for Economic Policy, is also convinced of this:
With inflation holding back growth, both central banks have reached a dead end: high inflation means low growth. This so-called stagflation makes both economies vulnerable to shocks like the Ukraine crisis. The fact that continued loose monetary policies have fueled the rise in public debt makes the dilemma even greater.
Gunther Schnabl to BTC-ECHO
The so-called stagflation would probably be the worst case. If you want to know what this is all about and what this means for Bitcoin, you should definitely take a look at the following comment from our editor-in-chief Sven Wagenknecht:
Will Bitcoin and company be disassociated?
The entire crypto market is still heavily correlated to tech indices like the Nasdaq 100 or the technological aviators of the ark invest-Universe. The great hope is that there will be an ever-increasing decoupling of the entire crypto market. A dream scenario would be, for example, Bitcoin developing in a similar way to gold in the stagflationary phase of the 1970s. Between 1970 and 1980, the price of gold skyrocketed from around $36 an ounce to over $600. the ounce in 1980.
Therefore, a recession is becoming more likely. If short-term rates continue to rise while long-term rates stagnate or rise less sharply, this is likely to result in an inverted yield curve for the foreseeable future. There is also a war in Ukraine, which is clearly having inflationary effects on commodity and energy markets, and another lockdown in one of China’s most important high-tech metropolises. In short, a toxic cocktail for the markets.
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