VINACHEM

Economists with Fitch Ratings said the eurozone is likely already in a recession that began in the current quarter, and the US is likely to enter into a recession in the second or third quarter next year amid persistently stubborn inflation.

Speaking during a webinar to go over its report released on 5 December, Fitch Ratings Chief Economist Brian Coulton said “the stubbornness of inflation” is one of the key issues supporting its forecasts.

“Inflation, once it gets to the higher levels and lasts for a certain amount of time becomes increasingly difficult to tame,” Coulton said.

He said he is seeing more evidence that core inflation is developing its own momentum and becoming more entrenched in the system.

“I think this is an increasing concern for central banks, such that even though there is a broad consensus that headline inflation rates will fall quite significantly next year, driven by food and energy, core inflation is looking like it is going be a lot stickier and may not have peaked at this point,” Coulton said.

“And I think to some extent, what we are doing right now is relearning some of the lessons from the 1970s, about how difficult and how painful it is to get inflation down,” Coulton said.

Touching on the European gas crisis, Coulton said things have not been as bad as initially expected but stressed that this is still a huge adverse supply shock that is currently making its way through the European economy, pushing up firms’ costs and reducing real wages and influencing consumer spending habits.

Coulton said that while the December report was somewhat pessimistic, and while some of the data that has emerged since then has been more positive in nature, “the real side implications of all of the challenges that the world economy is facing at the moment still lie ahead of us”.

Coulton said the surprisingly strong US labour market could begin to soften in 2023 from the cumulative impact of tightening monetary policy and real wage shocks to supply side issues.

“Interest rates have and will continue to rise a lot faster than we thought in previous forecasts,” Coulton said.

Looking at China, Coulton said Fitch has become less optimistic on a recovery to China’s housing sector.

On that country’s zero COVID policy, Coulton said the country has essentially abandoned the policy, but Chinese residents are self-isolating.

“And so, we were expecting the [Chinese] economy to shrink in the fourth quarter,” Coulton said, adding that the downturn is likely to span through the first half of 2023.