How a Recession in Europe Would Affect Us in the US

 

What could happen in the United States if Europe experiences a recession? Certainly, we would feel the effects of higher food prices. But the effects of a recession in Europe would be far greater, according to economists. Specifically, higher food prices would drag down the economy in the U.S. by more than one percentage point. And if that happens, the stock market would likely tank and consumer spending would plummet.

Economic impact of a recession in Europe

While the last recession was a mild one, it would still have an effect on us here in the US. Historically, recessions hit the US roughly once a decade. The business cycle is now turning with sickening speed and another one seems looming. Most of us will remember the financial heart attack we experienced in 2007-09, but the next recession will likely be milder and with unforeseeable consequences.

While there is still some concern about the effects of a recession in Europe, most analysts say the U.S. economy will not experience a recession this year. High oil prices, waning government aid, and a stronger dollar will slow growth this year. However, corporate profits and household debt load are all above pre-recession levels. While the economic outlook in Europe remains bleak, the US economy is still growing and it is forecasting above trend for the second year in a row.

The European financial crisis started as a banking system problem and then evolved into a sovereign debt crisis. In countries like Greece, a recession led to high public debts and banks having to be bailed out with taxpayer money. The EU's troika (the European Commission, the European Central Bank, and the International Monetary Fund) implemented emergency measures to stabilize their financial systems. In some countries, such as Uzbekistan, Turkey, and Israel, economic growth slowed to a crawl. These countries are all impacted by the recession in some way.

Impact of a recession on the stock market

There are several factors that influence the stock market during a recession, such as government stimulus packages and Federal Reserve Board action. Government stimulus programs, which are intended to boost the economy and prevent a further drop in the stock market, give a large infusion of cash to companies, local governments, and individual investors. Additionally, the Federal Reserve can initiate quantitative easing, or bond buying, to inject more money into the economy and boost the stock market.

Although stock prices tend to decline during a recession, they are often good opportunities to buy. There are companies whose business models are more resilient to economic downturns than others. Financial markets tend to be cyclical, with repeated patterns of expansion, peak, recession, and trough. In every recession, stocks usually rise or fall, and recover eventually. However, investors need to keep in mind that the timing and the direction of their investments can make a big difference.

Investors should keep a buffer of three to six months of living expenses in their portfolios. If you have extra money in the bank, it's a good idea to invest some of it. However, if you're worried about the economy's future, it's a good idea to start building an emergency fund before making investments. This way, you can continue to invest even after the recession has passed.

Impact of a recession on consumer spending

As GDP declines, consumer spending tends to follow. In past recessions, however, it did not show such a negative correlation. Rather, it fluctuated with the underlying economic circumstances. In other cases, consumers are the culprit of a recession, by pulling back spending in anticipation of a decline in personal income or job loss. This, in turn, lowers GDP. In such instances, the economy cannot recover quickly enough to compensate for the lost income or spending.

In general, the recession affected people of all ages, from young adults to the elderly. The unemployed and singles, as well as people who lived with their parents or other family members, were among the worst hit by the recession. These difficulties in life affected older adults' health and their spending patterns, and they often exhibited physical and mental symptoms. In particular, older adults were more likely to suffer from depression and sleeping problems.

During the last six recessions in the US, consumer spending has decreased by an average of 2.6%. The largest drop, however, was observed in the second quarter of 2020, when US GDP fell by 11 percent in the first half of the year. The US economy's economy is currently experiencing its worst recession since the Great Depression. This is a result of a shift from services to goods. Consumers are moving away from leisure-related services and toward spending on goods.