What’s happening: Goldman Sachs has lowered its forecast for US economic growth in 2022. Now it sees little to no growth for the first three months of the year.
Economists at Goldman, led by Jan Hatzius, said the chance of a recession in the US next year has risen to 35%.
“Rising commodity prices are likely to drive down consumer spending as households — and low-income households in particular — are forced to spend the bulk of their income on food and gas,” they told clients on Thursday.
They noted that real-time consumer confidence data from Morning Consult and Ipsos “shows a clear decline in consumer confidence following Russia’s invasion” of Ukraine.
This will not be the only source of stress. Financial conditions have also tightened, which could make it harder for businesses to access cash. Europe’s troubles will also hurt American companies with global supply chains and operations.
A step back: tough sanctions against Moscow after the invasion of Ukraine are hitting the Russian economy. The Institute of International Finance predicts it will contract by 15% this year, a recession twice as severe as the one that followed the global financial crisis.
But because Russia is a major exporter of oil and gas, as well as basic agricultural products and industrial metals, the effects of its economic collapse and isolation will be felt around the world. Europe, which is heavily dependent on Russian energy, is the most vulnerable, but the surge in energy and food prices will be felt across the Atlantic as well.
A recession in the US is not a done deal. On Thursday, Wells Fargo said it expects a recession in Europe, but not in America. In an interview with CNBC on Thursday, Treasury Secretary Janet Yellen stressed that the labor market remains very strong and American households are in “good financial health.”
“Inflation is a problem and we need to address it, but I don’t expect a recession in the United States,” Yellen said.
But analysts at Goldman Sachs are not the only ones who note the increase in risks.
“There is a growing threat that rising inflation will derail the nation’s strong economic recovery, leading to a recession,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a recent op-ed for CNN Business.
This increases the pressure on the Federal Reserve as it calculates its next move. The central bank intends to start raising interest rates this month in an attempt to bring inflation under control. However, if he withdraws support for the economy too aggressively, it could make a recession more likely.
The European Central Bank said on Thursday it would close the money taps earlier than expected despite the war in Ukraine. The hawkish tone surprised investors.
“The US is likely to outperform Europe, which is likely to slide into recession due to the greater domestic resilience and agility of the US economy, although the failure of the US Federal Reserve to respond to last year’s inflation in a timely manner — a historic policy mistake — will undermine policy flexibility,” wrote economist Mohamed El-Erian in a column published this week.
Investor Opinion: High inflation and slower economic growth, and uncertainty about what central banks can actually do to intervene, will not inspire investor confidence as the war rages on.
Wells Fargo has lowered its S&P 500 end-2022 target. He still believes that the index could rise sharply from current levels. However, the bank acknowledged that the economic conditions associated with the war are likely to affect the profits of companies, putting pressure on shares.
Wall Street joins retreat from Russia
Goldman Sachs (GS) and JPMorgan Chase (JPM) became the first major Western banks to leave Russia on Thursday after invading Ukraine. Most likely, others will follow, the cost of which will be tens of billions of dollars.
Latest: Goldman said it is “winding down its business in Russia in accordance with regulatory and licensing requirements.” JPMorgan quickly made a similar announcement.
The departures follow attempts by Western banks to calculate their exposure to Russia after President Vladimir Putin ordered an invasion of Ukraine, leading to punitive sanctions that cover much of the country’s financial system, including its central bank and leading commercial lenders, VTB. and Sberbank.
They also come after Western companies have squeezed out almost every other sector of the Russian economy, and rating agencies are warning that a Russian default is imminent.
Remember: getting Russia out of the global financial system will not be easy, and the extent of the consequences is still unknown.
According to the Bank for International Settlements, which suspended Russia’s membership on Thursday, international banks owe more than $121 billion. The total amount of claims of European banks exceeds 84 billion dollars. France, Italy and Austria are the most vulnerable. American banks owe $14.7 billion.
Banks are also worried about their employees in Russia and what Moscow might do next.
Kremlin spokesman Dmitry Peskov said on Thursday that the economic situation in Russia is “absolutely unprecedented” and accused the West of “economic warfare.”
Meanwhile, Putin has backed plans to seize assets left behind by Western companies that have suspended or ceased operations in Russia.
Shares of Chinese technology companies fall again
The future of major Chinese stocks traded on Wall Street is once again in doubt, leading stocks to plummet.
It’s just that: The US Securities and Exchange Commission on Thursday named five Chinese companies that could be removed from US stock markets for failing to comply with audit requirements.
The list includes fast food company Yum China Holdings, technology firm ACM Research, biotech group BeiGene, Zai Lab and pharmaceutical company Hutchmed.
But stocks of big technology companies have also fallen. Investors are concerned that new companies may be added to the US regulator’s list.
On Friday in Hong Kong, Alibaba shares fell more than 5%. Its US-listed shares fell nearly 8% on Thursday. JD.com fell 11% in Hong Kong after closing 16% lower on Wall Street. Baidu fell nearly 5% after falling 6% in the US.
Other dual-listed companies in the US and Hong Kong also fell sharply.
Why it matters: For now, tensions between Washington and Beijing have taken a backseat to the war in Ukraine. However, deep divisions between the world’s two largest economies persist, exacerbating the complex geopolitical environment in which policymakers must navigate.
Next
Latest reports on the University of Michigan Consumer Sentiment Survey at 10:00 AM ET.
Next week: The Federal Reserve is expected to raise interest rates for the first time since the start of the pandemic.