European and American bankers raise the alarm for the likelihood of a recession

• JP Morgan chief Jamie Dimon sounds the alarm on the global economic outlook.
• UK lender Santander has echoed Mr Dimon’s concerns.
• Why are leading bankers concerned about the economy, and should we be too?

European and American bankers raise the alarm for increased recession likelihood

Jamie Dimon is in the press this morning, sounding the alarm bells on the global economy. He believes the US is presently on a sound financial footing, but the future is somewhat uncertain. Mr Dimon has stated that the likelihood of a near-future recession in the US is increasing.

Europe is one of the US’s largest trading partners in exports and imports. Already wilting under the pressure of higher fuel costs because of the war on its borders, economic conditions on the continent are deteriorating.

Santander UK is the country’s fourth-largest mortgage lender and is concerned about the state of the economy. Santander UK is putting aside more money to cover an anticipated increase in defaults due to the rising cost of living crisis. The UK is the US’s seventh-largest trading partner.

Foreign earnings

Exports comprise approximately 10% of the US GDP, with the UK and Europe around 25% of those sales combined. Therefore a 5-10% reduction in demand from Europe would be a modest 0.1 to 0.2 % decrease in US GDP.

The foreign earnings of US companies would be most at risk, not necessarily all repatriated but certainly factored in when making hiring and firing decisions at home.

Around 40% of the US S&P 500 company revenues come from overseas. Here the US is more vulnerable to a sharp downturn in the global economy. Declining foreign earnings will form a negative feedback loop to the domestic economy and sour the outlook.

Global connection

The golden age of globalisation may be behind us, but the interconnectedness of international economies is still beneficial.

Australian share of GDP from exports currently sits at over 20%. Many of the derivative services that make up the bulk of our economy heavily rely on the capital flows from the mining and export sectors.

A European downturn will not only be felt directly through a decline in the demand for Australian coal and other raw materials but indirectly as well.

As an illustration, a decline in company earnings for US service providers operating in Europe could see retrenchments in the US. A rise in the number of US unemployed will result in a reduction in the volume of goods manufactured in China. Lower demand for Chinese factory output will stall plans for new roads and buildings in the country, throttling demand for Australian iron ore.

Horizon

Stubborn inflation, tight oil supply, and labour shortages have combined to curtail economic conditions. Large lenders are starting to sound the alarm bells of a global economy on the rocks, and we should listen!