Does The US Suffer From A European Recession?

The European Union’s economy has contracted for two straight quarters as a result of slow consumer expenditure and persistent inflation. This indicates that the eurozone entered a recession over the winter, and this year’s growth is probably going to be subpar.

However, they are also concerned about the spillover effects on the US economy and the world economy. Economists claim that the recession is moderate and that the broader European economy has managed to avoid a major dip.

The economists question if the United States could contract a cold if Europe sneezes. The solution, according to economists Ozge Akinci and Paolo Pesenti of the Federal Reserve Bank of New York, is more like “when Europe catches a cold, the rest of the world sneezes.”

What’s happening: According to a recent revision of data, the 20 nations that use the euro experienced a slight recession around the turn of the year as high inflation discouraged consumer spending and governments tightened their purse strings. That implies that the entire EU, as well as the eurozone, are currently behind the US economy.

Following a similar loss in economic output in the last quarter of 2022, the eurozone’s first three months of 2019 saw a 0.1% decline in comparison to the prior quarter.

Ozge Akinci and Paolo Pesenti, economists of the Federal Reserve Bank of New York, suggested that the real explanation is that “when Europe catches a cold, the rest of the world sneezes.”

What’s happening: According to a recent revision of data, the 20 nations that use the euro experienced a slight recession around the turn of the year as governments tightened their purse strings and high inflation discouraged consumer spending. That indicates that the US economy is currently outpacing both the eurozone and the entire EU.

The eurozone’s economic output decreased by 0.1% in the first three months of 2019 compared to the same period last year, following a similar decline in the fourth quarter of 2022.

Retracing history, let’s look at the year 2012 when Europe experienced a protracted debt crisis.

A credit crunch occurred across Europe as a result of worries over the continent’s financial stability, particularly in Greece. The US Federal Reserve was worried about that. The Fed’s meeting minutes from September 2012 show that they discussed their concern for contagion.

In the notes, it was observed that policymakers “noted that a high level of uncertainty regarding the European fiscal and banking crisis and the outlook for US fiscal and regulatory policies was weighing on confidence, thereby restraining household and business spending.”

A prospective worsening of the stresses in the eurozone, with potential spillovers to US financial markets and institutions and consequently to the overall US economy, stood out among these threats.

What happens next: Europe is far from experiencing a catastrophe of that magnitude. However, when the Federal Reserve delivers its most recent policy decision and economic estimates on Wednesday, we’ll have a greater understanding of how the Fed is considering the current European recession.

Bottom Line

When US Treasury Secretary Janet Yellen visits France the next week to take part in a summit organised by French President Emmanuel Macron to discuss a range of topics, including development banks and global debt, we’ll probably learn more about the potential for contagion.