The US might avoid a recession, but it won't be unscathed if the European economy tanks
- Several US bank executives recently said they don't believe the US is on the brink of a recession.
- Europe might not be so lucky, however, and that would also impact the US economy.
Some experts believe the United States is already in a recession. Some think it's heading there. Others say the US will avoid one altogether. But even if the country does avoid its second recession in three years, a struggling European economy could hinder US growth in the years to come.
With several big banks reporting earnings over the past week, investors and economists have been poring over the comments of banking executives for signals that a recession is on the horizon. Despite inflation-adjusted earnings declining at their fastest rate in 40 years and consumer sentiment near all-time lows, the earnings commentary struck a decidedly optimistic tone.
"While sentiment has shifted, little of the data I see tells me the US is on the cusp of a recession," Citigroup Chief Executive Jane Fraser said last Friday, citing strong consumer spending and the tight job market.
But while the data may currently suggest declarations of a recession are unwarranted, the US isn't out of the woods just yet. Even if the Federal Reserve plays its part well, a weak European economy could dampen the country's economic growth, making it more difficult for the central bank to achieve its desired "soft landing."
"We expect a very difficult winter is coming," Citigroup's Fraser said of Europe, "and that's due to disruptions in the energy supply," adding that this is "darkened by the belief that the war in Ukraine will not end anytime soon."
If the banks are to be believed, the European economy is indeed weakening, driven by the continent's exposure to the war in Ukraine and the related energy crisis. Like the US, inflation is on the rise as well — prices in the European Union rose 8.6% in June.
If the European economy does falter, the US won't be able to get away unscathed. In 2021, the US exported over $270 billion in goods to the European Union, accounting for roughly 15% of all exports. A weakened European economy could mean fewer exports —and sales — for American businesses.
In 2020, the US's top European exports were aerospace products and parts, mineral fuels, and machinery. Texas, California, and South Carolina exported more goods to Europe than any other states.
Morgan Stanley CEO James Gorman said that while the US and Asia could enter some form of a recession, Europe is "fighting the hardest right now because of the war in the Ukraine, because of the pressure on gas and gas prices."
It's not just the banks expressing concern about the European economy either. "For Europe, the risk of a recession is real," the British research firm Oxford Economics said in a report last week. A Bloomberg survey of analysts over the first week of July put the odds of a recession in Europe at 45%, an uptick from 30% from the prior month's survey.
This Thursday, the European Central Bank is meeting to discuss the path of interest rates moving forward. With the economy inching towards a recession, one might expect the central bank to lower interest rates to incentivize borrowing and spending. Europe's high inflation is a concern as well, however, and the bank may decide higher interest rates are necessary to stifle it.
Raising rates would also support the euro, which has fallen to a 20-year low relative to the US dollar. The weakened euro has made US imports more expensive for European consumers and businesses, another development that could discourage spending and harm American businesses.