Good morning, Peter Vanham here, filling in for Alan.
So, will we have a recession, or won’t we?
At least one Wall Street bank is confident that both Europe and the U.S. will avoid one, thanks to a motley crew of factors, including sweaters, small businesses, and Russian oil. That is the conclusion from my chat yesterday with Goldman’s senior energy economist, Daan Struyven.
Let’s start with Goldman’s most surprising take: even Europe won’t be having a recession, despite being plagued by persistent inflation and Russia’s ongoing war in Ukraine. That prediction is such an outlier, in fact, that no other major bank has yet followed it.
Whence the optimism? First, one of the warmest winters on record in Europe, combined with a surprising uptick in natural gas supply from the U.S. and Norway that made up for Russia’s shortfall, has made that gas prices tumbled almost to pre-war levels. On top of that, Struyven noted, “households and corporates have saved more energy than many economists had expected”. They turned the thermostat down and put on a sweater, and that may have been enough to avoid a winter recession. (You can take that literally, by the way: I’m writing this CEO Daily with a sweater on here in Switzerland.)
Moving on to the United States, Goldman believes the bearish layoff news of some of the Fortune 500 companies—particularly in tech and finance—is deceiving. “People are going back to the dentist, restaurant, and on a holiday,” Struyven pointed out. More broadly, leisure, hospitality, and state and local government, are seeing robust growth, alongside the health-care sector. With the exception of health care, he notes, “these are not Fortune 500 companies, so they are flying under the radar.” In other words, there is a “small-large” distinction, and “services-goods” distinction. On balance, the positive outlook in small businesses and the services sector wins out.
Finally, and perhaps most controversially, Struyven points to the calming effect Russian oil has on global prices. “Oil prices haven’t really moved much,” in the past few months, he said, “despite the fact that markets have become more optimistic” on the global growth outlook. In fact, prices have been falling. But why is that? “Because Russian oil supply is still holding up”, despite the Western embargo on Russian exports. From a growth and inflation perspective, this is good news. It keeps the global economic engine running. But from an embargo effectiveness standpoint, of course, it is a more eyebrow-raising outcome. It’s not fully surprising, either: India, China and Turkey all ramped up their purchases of Russian oil last year.
In sum, the U.S. and Europe are in a better place than many of us perceive, according to Goldman. And that in itself is the result of the weird post-pandemic economic cycle. On the one hand, the economy’s soft data, such as CEO and manufacturer sentiment, are depressed. On the other, the hard data—on employment, consumer spending, and increasingly core inflation and wage growth—are more positive.
There’s only one exception to Goldman’s bullishness and outlier predictions, by the way: Brexit Britain is still seen heading into a recession, due to its supply chain issues and labor market shortage.
More news below.
Peter Vanham
@petervanham
Peter.vanham@fortune.com
