Both US President Joe Biden and Jerome Powell, head of the US Federal Reserve, had recently shown themselves to be convinced that the economy would not slide into a recession. But now things are different. The US economy continued its slide in the spring.
Gross domestic product (GDP) fell by 0.9 percent on an annualized basis in the second quarter, the Department of Commerce announced on Thursday based on an initial estimate. In the first quarter of the year, economic output had already fallen by 1.6 percent. The economy has thus slid into a so-called technical recession – i.e. two quarters in a row with shrinking economic output.
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Even before the new figures were published, the White House tried not to overestimate this development. There are many factors to consider, stressed Biden’s spokeswoman, Karine Jean-Pierre. She referred to the strong job market. The unemployment rate in the US is at a similarly low level as before the outbreak of the pandemic in February 2020.
Biden likes to boast about these values - at the same time his approval ratings are suffering from rising consumer prices. “It’s not the President who caused the inflation. There are also external factors that have led us to where we are today,” emphasized Jean-Pierre, for example with a view to energy prices and supply chain problems due to the corona lockdowns in China.
At 9.1 percent, the rate of inflation in the USA is the highest it has been in around four decades. That’s a far cry from the 2 percent target the Fed has set for itself. The central bankers are therefore opting for a tight monetary policy – and could thus choke off the upswing. The Fed raised interest rates by 0.75 percentage points on Wednesday. It is now at a value of 2.25 to 2.5 percent.
The Fed has finally surpassed the European Central Bank (ECB). The European monetary watchdogs were only able to bring themselves to increase the rate to 0.5 percent in July. Significantly higher interest rates in the US tend to strengthen the dollar and attract capital from Europe to the US. The downside from the US perspective: American goods are becoming more expensive and therefore less attractive for other countries. In addition, the high interest rate means that the economy is less willing to invest – a dangerous tendency in times of a technical recession.
“What a shock!” is the verdict of Thomas Gitzel, economist at VP Bank. “Yesterday evening, the US Federal Reserve left no doubt that it would continue to hike interest rates despite the existing economic risks.” But analysts also share the US government’s assessment that the economic situation is better than the word recession suggests.
“A recession feels different: the decline in economic activity would have to be deeper and much broader,” says Bastian Hepperle from Bankhaus Aufhäuser Lampe. In particular, the development of employment does not fit in with a recession at all. But the economic downturn, inflation, rising key interest rates and significantly worse financing conditions would spoil the mood for consumption. LBBW’s Dirk Clench is also optimistic: “In view of the continued increase in employment, we take the same view as Fed President Jerome Powell and believe that the US economy is not yet in a recession.”