Recession Fears Resurface as U.S. Economic Data Deteriorates

LONDON (Reuters) – Global growth concerns have surged back into focus for financial markets, driven by disappointing U.S. economic data and escalating trade tensions that are undermining consumer confidence and business activity. While economists do not consider a recession to be the most likely scenario, the recent downturn in data has unsettled investors. Adding to the anxiety, U.S. President Donald Trump has implemented new 25% tariffs on imports from Mexico and Canada, further intensifying growth worries.

Market Reactions to Economic Signals

Oil prices have plummeted to their lowest levels since October, while stock markets from New York to Tokyo are retreating from recent multi-year highs. Additionally, two-year U.S. Treasury yields have dropped to their lowest since October, as bond investors anticipate a higher likelihood of near-term rate cuts. “One thing is essential for an economy, and that’s confidence, which has taken a hit,” stated Francois Savary, chief investment officer at Genvil Wealth Management, highlighting the declining sentiment among U.S. consumers and businesses.

Consumer Confidence Takes a Hit

U.S. consumer confidence experienced its most significant decline in 3-1/2 years this January, with retail sales witnessing their largest drop in nearly two years. Recent data on U.S. manufacturing activity also revealed substantial decreases in new orders and employment. Joost van Leender, senior investment strategist at Van Lanschot Kempen Investment Management in Amsterdam, remarked, “We don’t think we will see a (U.S.) recession, but we do see a modest growth slowdown.” He noted that consumers are feeling uncertain about the “chaotic” U.S. policy environment.

Economic Growth Projections Shift

Reflecting the changing economic landscape, the Atlanta Fed’s GDPNow model estimate for annualized growth this quarter plummeted to -2.8% from +2.3% just a week prior. Analysts emphasize that the recent U.S. data may have been influenced by one-off factors, such as severe weather and an influx of strong imports affecting the Atlanta Fed’s model. However, they also caution that the ongoing trade war is shifting focus from inflation concerns to the growth risks associated with U.S. tariffs.

International Trade Tensions Escalate

In response to the U.S. doubling of duties on Chinese goods to 20%, China has announced additional tariffs of 10%-15% on certain U.S. imports, effective March 10. Europe is also facing the threat of increased U.S. tariffs, leading to a 4% drop in trade-sensitive auto stocks on Tuesday following the announcement of tariffs on Mexico and Canada, where many vehicles for the U.S. market are manufactured.

Impact on Economic Growth

According to Morgan Stanley, the new U.S. tariffs on China, Mexico, and Canada could reduce U.S. economic growth by 0.7-1.1 percentage points in the upcoming quarters, inflict a 2.2 to 2.8 percentage point blow to Canadian growth, and potentially push Mexico into recession. Candace Laing, CEO of the Canadian Chamber of Commerce, warned that U.S. tariff policies are steering both Canada and the U.S. toward “recessions, job losses, and economic disaster.” On Tuesday, both the Canadian dollar and Mexican peso briefly hit one-month lows.

Currency Market Reactions

Interestingly, the U.S. dollar, which has typically gained from trade tensions, has also weakened as concerns about U.S. growth loom large. Analysts suggest that the ongoing trade war is exerting pressure on central banks worldwide to continue cutting rates to bolster growth. Traders are now pricing in a 75 basis point cut in rates, indicating a growing consensus on the need for monetary easing to support the faltering economy.

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