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Weekly global economic update

What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.

Of course, another reason for fear of recession is the tightening of monetary policy, which is a far better predictor of recession than the stock market. Monetary policy is being tightened in the United States, Canada, the United Kingdom and soon the Eurozone, but not in Japan or China. The tightening in the United States is of most concern given the massive footprint of the United States in the global economy. Yet even as the Fed tightens, data continues to indicate strength of the US economy as evidenced by recent news on retail sales, industrial production and labour market conditions. Even housing market activity remains robust despite a sharp rise in mortgage interest rates. If a recession comes soon, it will entail a sudden reversal of fortune. 

Given the evident strength of the US economy, why are equity prices down so much? There are several possible explanations. One is that prices were too frothy to begin with. That is, prices exhibited the characteristics of a speculative bubble and such bubbles ordinarily pop only once monetary policy changes. Another reason is the tightening of monetary policy itself. Theoretically, equity prices reflect the discounted present value of expected future earnings. When interest rates go up, the rate at which expected earnings are discounted rises, thereby reducing equity prices. Yet another explanation is that expected future earnings have actually declined because of rising commodity costs, expected increases in labour costs and expected increases in investment meant to revise supply chains. 

Finally, what is the risk of recession? The reality is that there is a 100% probability of another recession down the road. The question is how soon. Most forecasts, including our own Deloitte forecasts, suggest a low probability of a recession this year or even next year. Some of the bank CEOs who are touting an imminent recession are, evidently, at odds with their own economists. That is not to suggest, however, that economists always get it right. 

Many past recessions were due to excessive tightening by the Fed. There is no exact science to central banking. After all, each instance of change in monetary policy affects the economy in differing ways within varying time frames. Getting it right is difficult. The Fed is attempting to suppress inflation while averting a recession—no easy task.


Deloitte Global Economist Network


The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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Cover image by: Sylvia Chang

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