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Holes in the Recession Story

With surging inflation and a new war in Europe, the first half of 2022 was understandably gloomy for economies and financial markets around the world. But recent developments offer some hope that the prevailing pessimism may no longer be as warranted as it was a few months ago.

LONDON – With so much talk of stagnation, inflation, and stagflation in recent months, it is worth questioning whether the prevailing pessimism is justified. While I have shared in the gloom (warning early on that it could be a “bad year for markets”), I’m starting to reflect on my previous views, for four reasons.

First, I am struck by just how widespread the recession narrative has become. Almost everyone seems to believe that developed countries are heading into, or are already in, a recession. I have given multiple interviews to business consultants who all want to know “how to prepare for the recession.” As I remarked to one of them, I know of no previous recession that was so confidently anticipated as the one that is supposedly upon us now.

After all, the main reason that “recession” is such a scary word is that recessions are usually unexpected. Economic forecasters tend not to see them until they have already arrived. That is what happened in 2007-08 (which was admittedly rather unique) and again in 2020, following the arrival of COVID-19. Yet now, even some central banks (namely, the Bank of England) are openly forecasting a recession later this year. Has economic forecasting suddenly become better, or is something else going on?