"US, Eurozone, and Korea Face Possible Recession Within a Year... Warning Signs Lit"

[Asia Economy New York=Special Correspondent Joselgina, Reporter Kim Hyunjung] "United States, Eurozone, United Kingdom, Japan, Australia, Canada, and Korea."

These are the countries that investment bank Nomura has warned could fall into a recession within the next 12 months. The fear of a so-called R (Recession) is spreading due to soaring inflation and tightening moves by central banks around the world.

Signs that major economies, including the United States, are entering a slowdown phase are being confirmed one by one. On the 5th (local time), the inversion of the US long- and short-term Treasury yields observed in the New York bond market further fueled concerns about a recession.

◇ Korea Also Warned of Recession

Nomura and other major global investment banks and economic experts have been releasing increasingly concerned reports based on recently deteriorated economic indicators. Rob Subbaraman, Nomura’s Global Market Research Head, appeared on the economic media CNBC that day and said, "We have been pointing out recession risks for months and have been holding on," adding, "Now many advanced countries are actually falling into a recession."

According to the research note released by Nomura, besides the United States, the Eurozone, United Kingdom, Japan, Korea, Australia, and Canada are expected to fall into recession next year. The report’s main point is that as central banks accelerate tightening to curb inflation, the possibility of recession is increasing due to excessive interest rate hikes.

In particular, for Korea, where household debt problems are severe, there are concerns that if interest rate hikes trigger a collapse in the real estate market and deleveraging (debt repayment), the economy could fall into a deeper recession than expected. Subbaraman pointed out, "In a situation where many countries’ economies are weakening, relying on exports for growth is not advisable," adding, "This is another reason why we think the risk of economic contraction is very real and likely to happen."

The Bank of England (BOE), the UK’s central bank, also diagnosed in its financial stability report that the outlook for the UK and global economy has significantly worsened. BOE Governor Andrew Bailey warned at a separate press conference that day, "The risk of a global economic recession has increased," and cautioned that greater shocks could occur in the future. He pointed out, "Due to soaring inflation, weak growth, and tightening financing conditions (due to interest rate hikes), households and companies will find it more difficult to repay or refinance debt," adding, "They will inevitably be more vulnerable to additional shocks."

On the same day, Credit Suisse (CS) lowered its year-end forecast for the S&P 500 index, a representative US stock index, to 4300, although it said the economy has not yet met recession criteria. This is 12.4% lower than the previous 4900. Citigroup warned that if a recession occurs in the second half of this year, international oil prices could sharply fall to the mid-$60s per barrel.

◇ Increased Possibility of Negative Growth in US Q2

The inversion of US long- and short-term Treasury yields, considered a signal of recession, further spread market concerns that day. In the New York bond market, the benchmark 10-year Treasury yield fell below the 2-year yield at one point during the day.

Ian Linzen, head of US interest rate strategy at BMO, said, "Given that the 10-year Treasury yield is below 3%, the inversion indicates that something significant is happening in investor sentiment that cannot be ignored," adding, "This aligns with rising recession concerns."

Recently, indicators suggesting a slowdown in US economic growth have been released one after another. Earlier, the Atlanta Federal Reserve Bank’s GDPNow, which compiles real-time data, estimated on the 1st that the US second-quarter GDP growth rate would be -2.1% annualized. This is a warning that a 'technical recession,' meaning two consecutive quarters of negative growth, could become a reality.

That day in the New York bond market, Treasury yields fell. A decline in Treasury yields indicates a rise in prices of safe-haven government bonds. Risk assets such as international oil prices also plunged more than 8%, with West Texas Intermediate (WTI) falling below $100.

◇ Commodity Prices Plunge... Is the Super Cycle Over?

Not only oil but also futures prices of major commodities including metals and grains mostly declined that day. In particular, the US dollar surged to its highest level in 20 years, acting as a headwind for the dollar-denominated commodity price market.

That day, Ned Davis Research (NDR) stated in a client note, "The NDR commodity model has joined the bear camp," adding, "Current indicators are at their lowest since June 2020."

According to NDR’s model, among 19 commodities, only 7 were above their 200-day moving average, and 3 were above their 50-day moving average. Copper and oil have already entered bear markets. Due to growing recession concerns, copper prices have fallen 31% from their peak, and WTI has dropped 24%. The Baltic Dry Index (BDI) has retreated more than 50% from its peak, indicating that supply chain bottlenecks are easing.

NDR explained, "It remains to be seen whether demand will slow enough to put the brakes on inflation." If price increases continue, commodity prices could regain upward momentum, increasing the possibility of stagflation (rising prices amid recession) and leading to a prolonged bear market in stocks. They added, "Evidence of a major bull market or super cycle in commodities is diminishing."

This content was produced with the assistance of AI translation services.