Misery loves company. The economy is no exception.
As the US doggedly battles high inflation and braces for the aftermath of interest rate hikes, American consumers are also facing headwinds from Europe and the UK.
Months of rising energy prices, partly caused by the war in Ukraine, have wreaked havoc in the eurozone and experts are predicting a grueling, brutal winter across the Atlantic.
A looming recession in Europe could drain even more energy from the US economy through a somber stock market, falling exports, less foreign business and a drop in tourism.
“We often say that when the US sneezes, the rest of the world catches a cold. Well, the reverse is also true,” said Gregory Daco, chief economist at EY-Parthenon, in an interview this week.
Steeper stock market swoon
US stocks have tumbled this year as higher interest rates, slowing economic growth and stubborn inflation push the country to the brink of a possible recession. While hiring has remained remarkably strong so far, companies have seen their share values fall as investors fear the fallout from an economic downturn.
“Such negative views of the economy will force households to save what they can while soaring food and energy prices squeeze their incomes more,” Moody’s Analytics’ Ross Cioffi wrote in an analysis Thursday. “As consumers spend less, companies will invest and produce less. Uncertainties in supply and demand will cause companies to delay or cancel investments.”
A European recession would initially be visible to Americans as another force dragging stocks lower, particularly for US companies that are heavily dependent on doing business in Europe.
“The European economy is a major trading partner for the US, and if the European economy deteriorates, it would have an additional impact on the US economy,” wrote Angel Talavera, an economist at Oxford Economics, in an email Thursday. “There would also be financial spillovers and given how interconnected financial markets are, a bad recession in Europe would likely cause a lot of volatility in stock markets.”
The ongoing UK financial market meltdown could also rock American markets as a former pillar of the global economy faces rising prices and a falling currency.
UK financial markets have been reeling since the newly elected government of Prime Minister Liz Truss proposed a budget that includes tax cuts for wealthy Britons, energy subsidies and drastic cuts in social benefits. The plan was widely condemned, including by the International Monetary Fund, as dangerous and unrealistic in times of high inflation.
The value of the British pound has plummeted and the Bank of England stepped in to prevent a collapse of the pension system as bond yields soared.
“A financial crisis is still a worst-case scenario, but you can’t dismiss anything completely when you have moves of this magnitude,” Talavera wrote.
More bad news for US exporters and tourism
As the European economy faces slower growth and higher inflation, US companies involved in manufacturing and selling goods to the EU are likely to be hit harder.
The strong US dollar has already made American goods more expensive for foreign buyers, and a slowing EU economy will mean less willing international customers for these manufacturers.
The ailing EU economy and strong dollar will also affect international tourism to the US, posing further challenges to a sector that is typically less active in winter.
“Europe faces the brunt of the war against Ukraine on multiple fronts. It not only faces the consequences from a geopolitical perspective, but also the direct consequences of supply disruptions, price increases and transportation disruptions much more directly than anywhere else in the world,” Daco said.
Slower US job growth
There are many forces likely to weaken the labor market and increase the unemployment rate as the US heads into 2023, with Fed rate hikes topping the list.
As the Federal Reserve raises the cost of borrowing, US corporate profits will shrink and sales will fall, making it harder to hire — and even retain — some employees. Persistently high prices and the looming risk of another energy supply shock could also dampen the US labor market.
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A sharp contraction in the EU economy could force companies with deep European operations to retrench faster than others, contributing to the overall slowdown.
“What happens in the rest of the world eventually washes up on US shores,” Daco said.
“If the rest of the world is struggling just from an economic perspective, that reduces the growth prospects for the US, and reduced growth prospects in the US mean less hiring, less business investment and therefore less disposable income,” he said.
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