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July 3, 2022

Recession is still below the year-end horizon

Macro commentary by eToro analyst for Romania, Bogdan Maioreanu


Recession is a word that appeared recently in the narrative of both market participants and politicians. The Ukrainian conflict keeping commodity prices high and stretching the supply chains creates worries of a continuous highly inflationary environment that will impact economic growth. In a poll by CNBC 81% of Americans believe in a recession in 2022. And the belief, combined with visibly rising prices can lead to people cutting spending, impacting businesses and eventually the labor market. The Romanian economy starts to show signs of slowdown, shrinking by 0.1% in the last quarter of 2021, the first contraction since the second quarter of 2020 during the pandemic lockdown, reversing from a 0.4% expansion in the third quarter. The Romanian GDP grew by 2.4% yoy in the fourth quarter of 2021, slowing sharply from a 6.9% gain in the previous period.

In trying to anticipate a possible recession, the housing market is a good forward indicator. The high prices of materials combined with increased mortgage rates have started to impact the US housing market. According to the National Association of Home Builders Chief Economist, Robert Dietz, rising mortgage rates combined with significant tightening of monetary policy by the Federal Reserve will aggravate housing affordability challenges in 2022. Since the start of the year, the average 30-year fixed-rate mortgage increased from 3.1% to 4.67% by the end of March — the fastest rate increase in percentage terms in decades.  Sales of single-family homes in February slipped 6.2% below the February 2021 reading of 823,000. Some of this decline is due to price increases and higher mortgage rates but some is due to builders deliberately slowing sales to help counterbalance supply-chain delays. Europe has another issue which is given by the Housing Price Index that rose almost 42% from 2010 compared with the Rent Index that rose only about 12%, making recuperating investments in real estate taking a longer time and raising questions about feasibility of such investments.

Another element of worry related to a possible recession is given by new orders evolutions. There are reports that manufacturers are preparing for a slowdown of orders. Plagued by the silicon chip crisis, Nvidia, AMD and Broadcom products were flying off the shelves. But a recent report of the investment firm Truist slashed price targets across the board, telling investors it has found “hard evidence of order cuts.” Other factories worldwide are forced by supply chain issues and Covid 19 restrictions to slow down production.

However the last US manufacturing PMI was revised to 58.8 pointing to the strongest growth in factory activity in six months, amid faster increases in output and new orders, as domestic and foreign client demand ticked higher. Although backlogs of work rose at a sharper pace, firms noted that fewer supply bottlenecks allowed production to expand at a faster rate. Moreover, supplier delivery times deteriorated to the smallest extent since January 2021. But in Europe’s largest economy, Germany, last month Manufacturing PMI came at 56.9 pointing to the lowest growth in factory activity in 18 months, as the Ukrainian crisis weighed on export demand and led to fresh supply-side pressures. Inflows of new orders rose at the weakest rate for three months. We are still above the 50 mark that shows expansion but it is decelerating fast. This is pointing to a riskier environment in Europe as is closer to the conflict area. In the March ECB meeting minutes published last week a new word emerged: slowflation. “While the war would likely dent economic growth in the short term, annual growth was projected to remain positive even in the severe scenario, pointing to “slowflation” rather than stagflation”. Slowflation is a term that appeared in the 90s describing slower economic growth combined with inflation.

In China an interesting phenomenon started. Market data shows foreign investors sold a net 38.4 billion yuan ($6.04 billion) of Chinese stocks and bonds in the January-March period, one of the highest such quarterly figures on record. The net inflow of foreign capital continued until February, but flipped to a net outflow of 45.1 billion yuan in March. This is an unexpected effect of the Ukraine conflict and subsequent sanctions, making investors look more cautious to political environments.

Deutsche Bank was the first Bank to predict that “the twin shocks of the war in Ukraine and the build-up of momentum in elevated US and Europe inflation will lead to a recession in the US and a growth recession in the euro area within the next two years”. Despite the public belief, so far, Wall Street consensus is that 2022 will not bring a recession but for 2023 the odds are increasing. The markets are looking to the Fed trying to guess the magnitude of the interest increases and looking for signs on how these will impact the US economy. But history showed that from the first rate hike to recession on average 25 months passed on average.


Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.


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