Recession Fears Resurface in Global Markets

LONDON (Reuters) – Global growth concerns have surged back into focus for financial markets as disappointing U.S. economic data and escalating trade tensions undermine consumer confidence and business activity. While economists do not consider recession to be the base-case scenario, the recent data has unsettled investors. The introduction of new 25% tariffs by U.S. President Donald Trump on Mexico and Canada has further intensified worries about economic growth.

Market Reactions to Economic Indicators

Oil prices have plummeted to their lowest levels since October, and 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 increased chances of near-term rate cuts. Francois Savary, chief investment officer at Genvil Wealth Management, emphasized the importance of confidence in an economy, stating, “One thing is essential for an economy and that’s confidence, which has taken a hit.” This sentiment reflects the declining U.S. consumer and business confidence.

Consumer Confidence and Economic Slowdown

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

Shifting Economic Forecasts

Highlighting the shift in economic fortunes, the Atlanta Fed’s GDPNow model estimate for annualized growth this quarter plummeted to -2.8% from +2.3% just a week prior. Analysts caution that recent U.S. data may have been influenced by one-off factors, such as cold weather and strong imports affecting the Atlanta Fed’s model. However, they also point out that the ongoing trade war is shifting focus from inflation concerns to the growth risks posed by U.S. tariffs.

Global Trade Tensions Escalate

China has retaliated against the U.S. by doubling duties on Chinese goods to 20%, implementing additional tariffs of 10%-15% on certain U.S. imports effective March 10. Europe is also facing the threat of higher U.S. tariffs, leading to a 4% drop in trade-sensitive auto stocks on Tuesday, particularly after the 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 hit 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.” The Canadian dollar and Mexican peso briefly reached one-month lows on Tuesday.

Central Banks Under Pressure

Interestingly, the U.S. dollar, which typically benefits from trade tensions, has also weakened as concerns about U.S. growth loom large. Analysts suggest that the ongoing trade war is putting pressure on central banks worldwide to continue cutting rates to support growth. Traders are now pricing in 75 basis points of rate cuts in the near future, reflecting the growing anxiety surrounding economic stability.

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