The US central bank increased its policy rate by 75 basis points on Wednesday to a range of 1.5% to 1.75% as officials increased their fight against stubborn inflation.

Wells Fargo & Co now expects a “mild recession” for the end of 2022 and into early 2023. 

“The Federal Reserve is going to hike interest rates until policymakers break inflation, but the risk is that they also break the economy,” Ryan Sweet, Moody’s Analytics head of monetary policy research, said. “Growth is slowing and the effect of the tightening in financial market conditions and removal of monetary policy have yet to hit the economy.”

A recession is generally defined as a downturn in overall economic activity that is broad and lasts for more than a few months. The United States has only just emerged from the economic slump that was triggered by the Covid-19 pandemic. 

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The 2-year rate increased by more than 10 basis points to 3.1535%, hitting its highest level since 2007. The benchmark 10-year Treasury yield was also up, trading at around 3.1762%.

This week, a highly anticipated Federal Reserve meeting will be held, with the US central bank likely to announce at least a half-point rate hike on Wednesday. The Federal Reserve has already upped rates on two occasions this year, including a 0.5 percentage point increase in May in a bid to stave off surging inflation.

Last week, it was reported that the US consumer price index was up 8.6% in May on a year-over-year basis. This is its fastest jump since 1981, according to the Bureau of Labor Statistics. 

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In its most recent Global Economic Prospects report, the World Bank said it expects global economic expansion to drop to 2.9% this year from 5.7% in 2021. This is 1.2 percentage points lower than the 4.1% predicted in January. 

The report then predicts growth to maintain this level from 2023 to 2024 while inflation remains above target for most countries, which points to stagflation risks. 

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank President David Malpass commented. 

According to the report, growth in advanced economies will likely drop sharply to 2.6% in 2022 from 5.1% in 2021. 

Meanwhile, expansion in emerging markets and developing economies is expected to drop to 3.4% in 2022 from 6.6% in 2021.

“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality,”  Malpass said.

Joining other major bank CEOs warning about global economic health, Fraser said that conversations during her world tour with stops in Asia, Europe, and the Middle East focused predominantly on “the three Rs”. 

"It's rates, it's Russia and it's recession," Fraser said at an investor conference in New York, warning that, in Europe, "the energy side was really having an impact on a number of companies in certain industries that are not even competitive right now."

"Because of the cost of electricity and the cost of energy, some of them are shutting down operations. So Europe definitely felt more likely to be heading into a recession than you see in the US," Fraser added.

The Citigroup CEO said that, in the US, interest rates are a greater concern than a recession. 

"It's certainly not our base case that it will be, but it's not easy to avoid either.”

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In 2008 Central Banks bailed out the financial universe following the collapse of Lehman. They provided unlimited liquidity in the form of Quantitative Easing and Negative Interest Rate Policy to dodge a global recession and enable the longest bull market on record. In 2012 the ECB saved the Euro and Europe by doing “whatever” it took. In 2020 central banks stepped in to stabilise wobbling COVID struck economies with rate cuts and yet more liquidity.

Today? Central Banks are being assaulted on every front. Politicians are questioning their independence – blaming them for the effects of the sudden Ukraine War Energy and Food inflation spike. Markets are watching the bull market unravel and blaming Central Banks. Read any research on the market and it will cite “Central Bank policy mistakes” as the most likely trigger for recession, stagflation, and market collapse.

Financial professionals under the age of 40 have never known normal markets. They’ve learnt their trades in markets where Central Banks are expected to step in a stabilise markets, to prop up too-big-to-fail financial institutions, and keep interest rates artificially low, thus juicing markets ever higher. I reckon over half the market workforce – fund managers, bankers, traders and regulators – will never have encountered market conditions like those we’re about to experience as it all goes horribly and predictably wrong.

Thankfully, there are few old dogs like me still wagging our tails in markets. We’ve seen it all before. Proper market crashes, interest rates in double digits, mortgage rates that will make a millennial’s heart tremble, and inflation the likes of which we are now seeing again. But, even we don’t know what happens next. This time… it is different.

We can’t blame Central Banks for the war in Ukraine – that’s a classic exogenous shock. It’s a crisis the politicians really should have figured out, foreseen and prepared for. One of the prime duties of the state is security, and it’s the insecurity of energy and soon, food supplies, that have triggered the inflation shock.

The reality is exogenous shocks outwith central bank control have precipitated inflation in the real economy. But, let’s not kid ourselves: two factors successfully hid inflation for the last 12 years:

1. Most of the liquidity injected by central banks since 2008 flowed into financial assets (stocks and bonds), where price inflation was mistaken for investment genius. (It’s also generated massive wealth inequality between those that own stocks and those that don’t.)
2. In the wake of COVID, supply chains have unravelled. The Geopolitical Tensions now apparent between the West and China mean the end of the age of globalisation – and it was cheap Chinese exports that created the deflation that kept inflation artificially low during the twenty-teens.

In retrospect, the whole bull market of the Twenty-Teens looks increasingly false – a Potemkin village boom founded on overly cheap money, government borrowing and undelivered political promises. Abundant liquidity enabled the age of the fantastical – growth stocks worth trillions but profits measured in pennies, crypto-cons, SPACs and NFTs. Booming markets supported by accommodative central banks have spawned a host of consequences – few of which will prove ultimately positive.

Central Banks knew the risks from the get-go. They have been trying to figure out how to undo (or taper) the consequences of their monetary stimulus while maintaining the market stability critical for Western Economies. That has all suddenly unravelled at speed because of the inflation shock.

It’s the decisions taken over the past 14 years by Central Banks have led us to this critical moment in economic history. Since 2008 central banks have been using monetary experimentation to stabilise and control the economy and markets. And, as always happens, suddenly it’s turned chaotic. Its only now becoming apparent just how much these policies created massive market distortions, overturned the traditional investment narrative and caused the most massive misallocations of capital in global financial history at both the Macro and Micro levels.

Oops. 

Take a look at markets over the past 14 years and figure it out:

• The most speculative asset bubbles in history?
• Tremendous financial asset inflation on the back of ultra-low interest rates?
• Whole new financial markets like cryptocurrencies and NFTs emerging on the back of the broken monetary model – which will likely prove absolutely hollow scams.
• And the power of FOMO (Fear of Missing Out) dragging in millions of inexperienced retail investors to meme stocks – where they are now likely to be skinned and gutted?

Oops again…

How did it go so wrong? The Global Financial Crisis of 2008 threatened a global depression. The problems were multiple – a dearth of bank lending (caused as much by draconian new capital regulations as risk aversion), economic slowdown, and incipient recession… Central banks were forced to act, and flooded the economy with liquidity in the hope it would stimulate growth.

It didn’t. It created market bubbles. Investors quickly realised the easiest way to generate returns was to follow liquidity. Corporate managements figured out the best way to improve their bonuses was to inflate their companies' stock price – not through carefully considered investment in new plants and products to improve productivity and profits, but by borrowing money in the bond markets to buy back their own stock. And that’s worked well…Not! All that money has now been lost by crashing markets, and they still have to repay the debt.

Again… Oops…

In Europe the 2012 sovereign debt crisis followed the banking crisis, triggering massive fears of imminent country defaults and the Greek debt crisis. The ECB did what it took and used monetary policy to advance billions to banks through Targets Long-Term Repos and other emergency measures… Very quickly banks and the market realised central bank liquidity was an arbitrage opportunity – if the Banks were buying bonds, buy more bonds to sell to them!

As a result, nations like Italy saw the cost of their debt plunge, allowing some of the most heavily indebted nations to continue borrowing… Yet there is no guarantee, and never will be, that German taxpayers will ever agree to pay Italian pensions. As the German terror of hyperinflation is raised, and Europe suffers stagflation, it's highly likely we will see new tensions across European debt arise. That’s why it’s a politician rather than a central banker running the ECB!

Guess what… Oops…

How did the Central Banks intend to undo the consequences of the distortion they created? Taper? Hah. We are passed that stage now. I guess we will never know how they planned to untie the knot they created...

The good news is chaos spells opportunity for smart investors!

Experts such as Dutch bank economist James Smith and the International Monetary Fund (IMF) have warned the public and businesses alike of the possibility of an economic downturn. Furthermore, fintech giant Klarna recently announced that it would be firing 10% of its staff in preparation for this outcome. With this not-so-promising outlook, what can businesses do to survive an economic crisis?

1. Consider Going Remote

In 2020, the world witnessed a historic shift in the job market as the covid-19 pandemic forced many businesses to close their doors and their employees to begin working from home. This initial forced trial has since convinced many businesses to go remote for good, abandoning their offices altogether, and thus saving significant sums of money in the process.

Data from Global Workplace Analytics suggests that companies can save an average of $11,000 (approximately £6,800) per year for every employee who spends half of their time working from home. The key factors behind this figure are increased productivity, lower real estate costs, reduced absenteeism, and reduced staff turnover. 

Source: https://globalworkplaceanalytics.com/telecommuting-statistics

2. Keep Up The Marketing

While your business might be looking for areas to reduce spending, marketing shouldn’t be one of them — or at least not too drastically. Amid a recession, businesses should do whatever they can to stay front-of-mind for customers. At a time when consumers will be cutting back on spending, you need to remind them that your product or service is important to them —  it’s something that they need. As well as maintaining marketing strategies that are already working for you, businesses should also consider:

• Sending out regular, high-quality emails to current customers on your mailing list
• Placing targeted adverts online
• Posting regular content to your social media channels 
• Holding contests, sales, or events

However, it’s important that businesses keep their message and approach considerate during difficult times. Being pushy may secure sales in the short term, but coming off as insensitive will likely tarnish your reputation in the long run.

3. Protect Cash Flow

A recession will see your profit margins slim, making it increasingly difficult to maintain a healthy cash flow. Some effective options for cushioning your cash flow include: 

• Stop focusing 100% on profits: Unfortunately, having a profitable business doesn’t automatically equate to having a healthy cash flow. Speaking to Finance Monthly, Corporate Lawyer Bobby Gill explains that if a business's product goes through a long sales chain, but customers fail to pay their invoices for 3 months, a business may technically be profitable, but will have no cash to hand. On the flip side, a business may have a healthy cash flow, but limited profits. Gill points out that both profit and cash flow are necessary for success and each requires the same amount of attention.

• Cut back on non-essential spending: Businesses should regularly audit their spending, but especially so amid or in the run-up to a recession. Consider whether there are any services, resources, or subscriptions that you can cut back on or eliminate. Are there any products that you can purchase for less? Can you switch suppliers to get a better deal?

• Invest in your existing customers: The cost of recruiting new customers is much higher than the cost of maintaining existing ones, especially during a recession when people are trying to keep their spending minimal and are less likely to spend on goods or services that are new to them. Your current customers already know how great your product or service is. But, to secure their loyalty through tough times, you need to maintain standards, or push them higher, to keep your client base satisfied and keen to spend money with you.

Wrap Up

Recessions pose a major threat for businesses, especially those that are small and/or still new to the scene. However, an economic downturn doesn’t necessarily spell the end. With a careful plan of action, businesses can come out stronger on the other side.

Disclaimer: The information contained within this article is for educational and entertainment purposes only and should not be considered as personalised advice or recommendation.

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Klarna CEO and co-founder, Sebastian Siemiatkowski, made the announcement to his workforce via a pre-recorded video message on Monday. While most Klarna employees won’t be impacted by the cuts, Siemiatkowski said some will be informed that Klarna can no longer offer them a role. 

“When we set our business plans for 2022 in the autumn of last year, it was a very different world than the one we are in today,” Siemiatkowski said.

“Since then, we have seen a tragic and unnecessary war in Ukraine unfold, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession.”

Klarna currently has over 6,500 employees worldwide.

Buy now pay later companies, such as Klarna, which allow consumers to spread the cost of purchases over a series of interest-free instalments, became exceedingly popular over the Covid-19 pandemic as consumers spent more on material items. 

However, a potential recession would undoubtedly see the popularity of such services decline as consumers look to cut down on non-essential spending.

The fall marks its lowest point in two weeks as the demand outlook was pressured by increasing recession risks and Covid-19 lockdowns in China. Additionally, a strong US dollar made crude oil more costly for buyers purchasing in other currencies.

US West Texas Intermediate crude oil was down 3.2% to $99.76 a barrel, while Brent crude dropped 3.28% to $102.46 a barrel. 

Also on Tuesday, French President Emmanuel Macron and Hungarian Prime Minister Viktor Orban discussed energy security amid EU efforts to persuade Hungary to agree to proposed sanctions on oil imports from Russia.  

"These are volatile times, the daily price bars are outsized these days," commented John Kilduff, a partner at Again Capital LLC. "As the EU continues to dither over whether or not they are going to embargo Russian oil, that changes the calculus very much as well in both directions.”

On Wednesday, the Federal Reserve upped its benchmark interest rate by half a percentage point. Additional interest rate hikes, as well as tightening of monetary policy, have exacerbated fears that the US economy could enter into a recession.

“The market still needs to digest the impact of tighter monetary policy on all risk assets and crypto might take a hit as correlations [with US stocks increase]”, said Josh Lim, head of derivatives of New York-based brokerage Genesis Global Trading.

On Friday, Bitcoin was down less than 1% at $35,900.25, according to Coin Metrics. Meanwhile, Ether was down 1.1%. 

The crypto sale was sparked by a difficult Thursday on Wall Street where the Dow Jones Industrial Average lost over 1000 points. Nasdaq also fell 5%. The losses of each marked the worst single-day decline since 2020.  

While attending the World Bank and IMF spring meetings in Washington on Thursday, Bailey said the BoE is striking a difficult balance between combating inflation and tackling the threat of recession. He also voiced concerns over increasing wages keeping inflation higher for longer.  

"We are now walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that that could create a recession and pushes too far down in terms of inflation," Bailey said at the Peterson Institute for International Economics.

While officials have begun to tone down their language on the need for further rate hikes, Bailey did point to another rise next month. The BoE has already increased interest rates on three occasions since December. Some traders believe the bank is looking to adjust rates from their current 0.75% level to 2.5% by this time next year. 

In March, consumer price inflation hit a record 7%, over three times higher than the BoE’s target of 2%. 

The New York-based bank said profits fell 42% from a year earlier to $8.28 billion, or $2.63 per share. Adjusted earnings of $2.76, which excludes the 13-cent impact of the Russia-Ukraine conflict, go above the $2.69 estimate of analysts surveyed by Refinitiv. Revenue, meanwhile, was down 5% to $31.59 billion, surpassing analyst predictions for the quarter. 

The quarter illustrates how rapidly events in Europe have shifted the industry’s outlook. In 2021, JPMorgan Chief Executive Jamie Dimon said he expected a long-running economic expansion, with banks profiting from billions of dollars in loan loss reserves being released. Fast-forward a year, Dimon is warning of the possibility of a recession amid spiralling inflation and ongoing fighting in Ukraine. 

“We remain optimistic on the economy, at least for the short term,” Dimon commented. “Consumer and business balance sheets as well as consumer spending remain at healthy levels – but see significant geopolitical and economic challenges ahead due to high inflation, supply chain issues and the war in Ukraine.”

The economy’s 7.5% expansion was the largest since 1941 and made the UK the quickest-growing advanced economy in 2021. In December, gross domestic product fell 0.2%, with the spread of the Omicron variant of coronavirus encouraging more people to stay at home. 

These recent figures are encouraging amid the cost of the living crisis, likely keeping the Bank of England focused on efforts to restrain rocketing inflation with an interest-rate hike looming in the near future. 

After being hit hard by a pandemic recession, the UK has enjoyed a strong recovery, accelerated by billions of pounds of government support for jobs and companies. At present, the country’s economy is set to outperform other Group of Seven nations yet again this year. 

However, despite the positive sign that these recent figures reflect, the UK is yet to return to its pre-pandemic levels of quarterly output. This is a milestone already reached by both France and the United States.