Current topics with regard to the economy, investment (responsible investment in particular), pensions, and income: Every week, an expert at APG provides a clear answer to the “Question of the week”. This time, macroeconomist and senior strategist Charles Kalshoven explains whether we’re right to be scared of a recession.
Although the economy rapidly recovered immediately after the pandemic, the current outlook for the global economy is worsening once again. The war in Ukraine and a new wave of COVID-19 in China, which has caused another partial lockdown of the country’s economy, are weighing on growth. Disrupted supply chains for energy and machine parts—or fears of disruption—are further pushing up prices. And inflation was sky-high even before all this. Central banks are now fast-tracking measures and, one after the other, raising interest rates. But won’t that put us into recession? Is the fear of a period of economic downturn—with the risk of more bankruptcies, higher unemployment, and falling tax revenues—the reason for the current stock market plunge?
“Almost every recession is preceded by a bad stock market performance. But this doesn’t work in reverse. Not every bear market, meaning a 20% decline in stock prices, is followed by a recession. It’s often a false alarm,” argues Kalshoven. “If you look at companies’ recent profit figures, they’re reasonably as expected. It’s also not the case that analysts have become more negative about next year’s profits. So, these factors don’t necessarily point towards a recession. Interest rates are the more likely cause of falling stock market prices. When interest rates rise, the present value of future profits falls. This in turn translates into lower stock market prices. A degree of uncertainty plays a role in this value, such as how exactly the tightening of monetary policy will affect the economy. Will we manage to contain inflation without causing excessive collateral damage to growth? The Bank of England, for example, has already warned that the British economy will enter recession later this year.”