Weekly Buzz: 🐈 Schrödinger's recession: Why it hasn't arrived yet

07 July 2023

⏰ Coming, but not arriving (yet)

Like Schrödinger's cat, this recession seems to be in two scenarios at the same time: both coming and not. When central banks started hiking interest rates aggressively to combat inflation, experts warned of an impending recession. But even now, with interest rates across the US, UK, and Europe at 20-year highs, the highly anticipated downturn remains elusive.

So, what’s delaying a recession?

  1. Consumers have a big pool of savings to tap into, thanks to trillions of dollars’ worth of government-assisted pandemic payouts. And in the high interest rate environment we find ourselves in, banks are offering similarly high savings rates. This means consumers can keep spending, so long as they have a cushion of cash stashed away.
  2. Governments are also spending – by the trillions. For an example of where this money is going, just look at the global move towards clean energy – a transition like this takes a lot of money. The International Energy Agency found that countries have allocated USD 1.34 trillion towards clean energy since 2020, worldwide.
  3. Interest rates seem high, but real interest rates (see our Jargon Buster below) in the US have only recently crossed into positive territory. And in Europe, real rates are still in the negative, even though the European Central Bank hiked nominal rates to 3.5% in June. This suggests that nominal rates could go higher still before these economies get knocked off course – and it’s clear global central banks aren’t backing off from their fight against inflation anytime soon.

There’s no such thing as a sure bet

At the turn of the year, most experts had gloomy predictions. And they had good reason – inflation was spiralling up and economies were cooling down. Analysts aren’t fortune-tellers, but they extrapolate to the best of their ability. After all, surprises, by their very nature, don’t happen all the time. But with six months behind us, 2023 isn’t quite turning out to be an annus horribilis.

So, when exactly a recession will arrive is difficult to say, even for the experts. But by keeping your mind open to a range of outcomes, you’re able to make better investment decisions. After all, there’s no such thing as a sure bet when it comes to investing.

Make no mistake, it’s difficult for any investor to navigate an uncertain landscape like this. And  we’re currently in a stagflationary environment, characterised by a tough combination of weak economic growth and high (but now cooling) inflation. With these challenges in mind, it seems staying on the defence could be the best offence.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Real interest rates

Real interest rates represent the true cost of borrowing money, accounting for the impact of inflation. Unlike nominal interest rates, which are the stated rates without considering inflation, real rates adjust for changes in the purchasing power of money.

Let's say you take out a loan with a nominal rate of 5%. If the inflation rate is 2%, then the real rate on your loan is actually 3%. The true cost of borrowing money is lower than the nominal rate suggests, because inflation has reduced the value of each dollar borrowed.

Understanding the difference between nominal and real interest rates can help you make more informed decisions when borrowing or investing money.

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