Policy- The prospect of a recession in Europe is looking increasingly likely.
- It would bring hardship for millions across the continent.
Europe looks to be headed for a recession — and its loss could be a gain for the United States as it looks to avoid a recession of its own.
In August, Goldman Sachs analysts put the probability of a recession over the next 12 months at 60% for Europe and 30% for the US.
If this forecast proves to be true, and Europe experiences a recession before the US, it could decrease the chances that the US experiences the same fate.
"The United States, as the largest economy in the world, the largest producer of oil and natural gas, and with one of the strongest recoveries, should be able to weather the storm in Europe," former Federal Reserve economist Claudia Sahm wrote in a September post. "Their hardship will sharply lower their demand and help bring our inflation down."
In the US, the Federal Reserve is raising interest rates to combat inflation. The farther the Fed has to go in order to see prices moderate, the greater the chance the economy bypasses a mild "growth recession" and experiences a more painful downturn. It's possible a recession in Europe, however, could help the US reduce inflation, avoid a recession of its own, and save millions of American jobs.
Fewer exports and a strong dollar could help the fight against inflation
In 2021, the US exported over $270 billion in goods to the European Union, accounting for roughly 15% of all exports. Aerospace products, mineral fuels, and machinery were the highest share of purchases.
A European recession would likely result in decreased demand from across the pond and fewer exports. That's due to both decreased spending power among European shoppers and a weakening euro. It could help to ease price pressures in the US.
Concerns over the state of the European economy have also contributed to a decline in the euro's value relative to the US dollar. The euro fell to parity — an exchange rate of one euro to one dollar — in July and continues to trade near a 20-year low.
This dynamic is likely to persist in the months ahead and could "help us in our fight against inflation," Desmond Lachman, a senior fellow at the American Enterprise Institute, told Insider.
"A stronger dollar would reduce our cost of European imports while a weaker European economy would accelerate the big decline that we are already seeing in internationally traded commodities," Lachman said.
Conversely, a weak euro makes US goods more expensive for European consumers and businesses, which makes them less likely to import US products. This decline in demand could also help ease inflation.
And when US corporations convert the European sales they do get back into US currency, a strong dollar dampens profits. It could shave off as much as $100 billion in combined earnings for S&P 500 companies this year. While this decline could hurt some businesses, the US economy — which is less reliant on exports due to its own strong consumer spending — is arguably well positioned to sustain it.
Less money flowing through corporations' coffers could be good news on the inflation front. When profits fall, share prices tend to follow, and it may lead some consumers to cut back after checking their stock portfolios. Perhaps more importantly, fewer profits means less money for business investment that could add fuel to the economy.
Although US energy prices have already begun to ease in recent months, a slowdown in Europe — just as the recent slowdown in China slowdown has done — could help keep oil prices in check.
And while the US is currently providing more natural gas to Europe — which is looking to pivot away from Russia — a recession "could put downward pressure" on natural gas prices in the US as well, Patrick De Haan, the head of petroleum analysis at GasBuddy, told Insider.
But a recession in Europe wouldn't extinguish US inflation
To be sure, a recession in Europe is a bad outcome that would create hardships for millions of people. Even for the US, a European recession would weaken "one of our important export markets" and add to "world financial market volatility," Lachman said, developments that shouldn't be overlooked.
And a recession wouldn't be a cure-all for the US's inflation either.
Rising food prices for instance have been impacted by factors that include a drought in Brazil, a deadly avian flu, and the war in Ukraine. A downturn in Europe won't resolve any of these.
The same goes for US housing costs, which rose 5.7% in July, due to among several reasons, a lack of supply.
Ultimately, it's possible a slowing European economy would ease US inflation and help the country avoid a recession. But if the US does enter a significant downturn, it could find itself wishing it had a friend across the sea whose spending could give its economy a boost.