Global recession is at hand: What makes the current economic situation so special?

Somehow it doesn’t and doesn’t fit the usual picture of an economic cycle with recovery, boom, overheating and downturn. Are we now in a boom or are we already in the midst of a downturn?

Weak demand for goods and strong consumption of services

Parts of the economy are definitely heading towards a decline. Leading indicators from the industry point to a steep decline, particularly in Europe, including Switzerland. In some cases, production and order status have reached levels that normally occur only in a recession. Demand for goods soared during the pandemic—a bigger car, a better grill, anything ordered from the comfort of your new seat—now hangover follows.

At the same time, the sharp rise in interest rates is affecting real estate markets more in some places, such as Germany or Sweden, and less in others, such as in this country.

But at the same time, signs of the labor market are pointing to a boom and consumerism seems unchecked. This is also what makes the current macro situation so unique and mysterious. Given the bleak prospects, shouldn’t companies have already hit the brakes and laid off? Shouldn’t we expect consumers to tighten their belts as inflation lowers purchasing power and rents and mortgage costs rise?

Both phenomena – strong labor market and stable consumption – are interrelated and partly due to the pandemic. The willingness to spend is only possible because there is a lot of savings left over from the period when consumption was restricted and the income flow continued thanks to the Corona aid money.

In addition, many needs have accumulated, such as traveling abroad and attending events, which are now compensated – as well as by credit if necessary – as the US credit card debt figures show. This credit spree is only possible because the labor market is very tight, that is, because there are many vacancies. Anyone who benefits from wage increases and doesn’t have to worry about losing their job is also less afraid of debt.

Full employment and hoarding

Full employment almost everywhere and companies complaining of staff shortages are also a result of Corona. The pandemic has caused many to retire early or reduce their workloads. And of course demographic change also plays a role because baby boomers are now retiring and leaving a huge gap in the labor market.

Now that the economy has lost momentum, companies are hesitant to lay off staff because they know how difficult it is to find good people again. Economists are already talking about accumulating labor.

This may be fine for a while, but not forever. Unemployment will initially be low and consumption will remain constant. Ultimately, however, hoarding workers means companies are hiring more staff than makes sense economically. You can do without a pay increase. Reducing wages is seen as impossible because it demoralizes employees so much.

Profit margins under pressure

The resulting high wage costs put pressure on profitability. This means that companies’ profit margins will now come under pressure after they’ve managed to increase in some cases drastically during the recovery. Even US analysts, who are often a little too optimistic about their companies, expect an average of 9 percent decline in earnings for the current reporting season compared to the same quarter of the previous year. First of all, this is bad news for stock markets.

Secondly, however, consumers and the economy as a whole will suffer if companies reduce their investments due to unprofitability and are eventually forced to cut staff. Layoffs are also inevitable outside the tech sector.

Moreover, the impact of a large increase in interest rates on the economy will only take full effect with a delay. In the US, where interest rates were raised from zero to 5 percent and 30-year mortgages are now 7 percent, every sharp rise in interest rates in the past has led to a recession.

In other words, at some point the post-corona party will truly end.

The pattern is the same in Switzerland, although the numbers here are slightly smaller and the average new five-year flat rate mortgage has “only” increased from 1 percent to 3 percent.

However, if the US really does go into a recession, Switzerland will feel its effects first and foremost through foreign trade. It is not yet clear whether domestic consumption will remain stable enough to protect the entire economy from a recession.