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Europe’s reliance on energy from Russia has jacked up the odds that the region could enter a recession this year as soaring inflation pushes people to cut back spending. The United States is more insulated from the spike in oil and gas prices — but it’s not immune.
What’s happening: Goldman Sachs has downgraded its forecast for US economic growth in 2022. It now sees little to no growth during the first three months of the year.
Goldman’s economists, led by Jan Hatzius, said the chance of a recession in the United States over the next year has risen as high as 35%.
“Rising commodity prices will likely result in a drag on consumer spending, as households — and lower-income households in particular — are forced to spend a larger share of income on food and gas,” they told clients on Thursday.
Real-time data on consumer confidence from Morning Consult and Ipsos “show a clear decline in consumer confidence since Russia invaded” Ukraine, they noted.
It won’t be the only source of stress. Financial conditions have also tightened, which could make it harder for businesses to access cash. Europe’s woes will also hurt American companies with global supply chains and operations.
Step back: Harsh sanctions on Moscow following the invasion of Ukraine are pummeling Russia’s economy. The Institute of International Finance predicts it will shrink by 15% this year — a recession twice as severe as what followed the global financial crisis.
But because Russia is a major exporter of oil and gas, as well as key agricultural products and industrial metals, the effects of its economic collapse and isolation will be experienced globally. Europe, which is highly reliant on Russia for energy, is most exposed, but the spike in energy and food prices will be felt across the Atlantic, too.
A US recession is not a done deal. Wells Fargo said Thursday that it expects a recession in Europe but not in America. In an interview on CNBC Thursday, Treasury Secretary Janet Yellen emphasized that the job market remains very strong and American households are in “good financial shape.”
“Inflation is a problem, and it’s one that we need to address, but I don’t expect a recession in the United States,” Yellen said.
But Goldman Sachs analysts aren’t alone in observing that risks are climbing.
“There is the growing threat that rising inflation will overwhelm the nation’s strong economic recovery, resulting in a recession,” Mark Zandi, the chief economist of Moody’s Analytics, wrote in a recent column for CNN Business.
This adds to pressure on the Federal Reserve as it calculates its next move. The central bank intends to start raising interest rates this month as it tries to get inflation under control. However, if it pulls back support for the economy too aggressively, it could make a recession more likely.
The European Central Bank said Thursday that it will tighten the money taps sooner 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, owing to the American economy’s greater internal resilience and agility, though the US Federal Reserve’s failure to respond to inflation in a timely manner last year — a historic policy mistake — will undermine policy flexibility,” the economist Mohamed El-Erian wrote in a column published this week.
Investor insight: High inflation and slower economic growth, along with uncertainty about how much central banks can really do to intervene, won’t inspire confidence in investors as the war rages on.
Wells Fargo has lowered its 2022 year-end target for the S&P 500. It still thinks the index could rise sharply from current levels. The bank acknowledged, however, that economic conditions tied to the war are likely to hit corporate earnings, which will weigh on stocks.
Wall Street joins the pullback from Russia
Goldman Sachs (GS) and JPMorgan Chase (JPM) became the first major Western banks to get out of Russia on Thursday following the invasion of Ukraine. More are likely to follow, at a cost of tens of billions of dollars.
The latest: Goldman said it is “winding down its business in Russia in compliance with regulatory and licensing requirements.” JPMorgan quickly made a similar announcement.
The departures follow a scramble by Western banks to tally their exposure to Russia after President Vladimir Putin ordered the invasion of Ukraine, triggering punishing sanctions that cover most of the country’s financial system — including its central bank and top commercial lenders, VTB and Sberbank.
They also come after Western businesses stampeded out of almost every other sector of Russia’s economy, and as ratings agencies warn that a Russian debt default is imminent.
Remember: Untangling Russia from the global financial system won’t be easy, and the full extent of the fallout still isn’t known.
International banks are owed more than $121 billion by Russian entities, according to the Bank for International Settlements, which suspended Russia’s membership on Thursday. European banks have over $84 billion in total claims. France, Italy and Austria are the most exposed. US banks are owed $14.7 billion.
Banks are also worried about their employees in Russia, as well as what Moscow could do next.
Kremlin spokesperson Dmitry Peskov said Thursday that the economic situation in Russia is “absolutely unprecedented” and blamed the West for an “economic war.”
Putin has meanwhile given his backing to plans to seize assets left behind by Western companies that have suspended or abandoned operations in Russia.
Chinese tech stocks are getting hammered again
The future of major Chinese stocks trading on Wall Street has once again been called into question, sending shares dramatically lower.
This just in: The US Securities and Exchange Commission on Thursday named five Chinese companies that could be removed from American stock markets for failing to meet audit requirements.
The list included fast-food company Yum China Holdings, tech firm ACM Research, biotech group BeiGene, Zai Lab and pharmaceutical company Hutchmed.
But big tech stocks also fell. Investors are concerned that more companies might be added to the US regulator’s list.
Alibaba dropped more than 5% Friday in Hong Kong. Its US-listed stock ended down nearly 8% on Thursday. JD.com plummeted 11% in Hong Kong, after closing 16% lower on Wall Street. Baidu was down nearly 5%, following a 6% drop in the United States.
Other companies with dual listings in the United States and Hong Kong also declined sharply.
Why it matters: Tensions between Washington and Beijing have taken a back seat to the war in Ukraine for the time being. Still, deep divisions between the world’s two biggest economies persist, adding to the complex geopolitical environment that policymakers need to navigate.
The University of Michigan’s latest consumer sentiment survey posts at 10 a.m. ET.
Coming next week: The Federal Reserve is expected to hike interest rates for the first time since the pandemic arrived.