We watched two critical issues closely last Thursday. The first was the growth data of the U.S. economy. The second was the CBRT's Inflation Report.
US ECONOMY CONTRACTED AGAIN
In my previous column, I talked about the possibility of the U.S. economy entering a recession and wrote at length about the technical discussions surrounding the concept of recession. I will not repeat these discussions here. However, the data released since means that the U.S. economy is technically in a recession.
The U.S. economy contracted by 1.5% in the first quarter of this year. In fact, the rate was later revised to 1.6%. Contrary to the contraction, the expectation was 1.1% growth. In the second quarter, while the market expectation was 0.4%, the economy contracted by 0.9%.
RECESSION OR NOT?
The common belief in the economic literature is that a recession is a contraction of an economy for two consecutive quarters. However, the U.S. National Bureau of Economic Research (NBER) defines a recession as "a significant decline in economic activity that spans all areas of the economy and lasts for more than a few months". NBER also has the authority to announce whether the U.S. economy is officially in recession.
In other words, even if the U..S economy has contracted for two consecutive quarters, NBER can say that the economy is not in recession.
FED DECISION POWELL'S SPEECH
One day before the U.S. growth data, we followed the Fed's interest rate decision and Fed Chairman Powell's speeches. The Fed increased interest rates by 75 basis points, in line with expectations. Afterward, Powell said, “It would be appropriate to slow the rate hikes at some point.” The announcement was well received in the markets. Powell also repeated that he does not expect a recession for the U.S. economy. However, the data the following day indicated that the US economy contracted for two consecutive quarters. Let's see if the "soft landing" scenario predicted by Powell for the U.S. economy will come true.
Because in the past, Fed Chairman Greenspan had said before 2008 that "there is no crisis risk". Again, while Treasury Secretary Yellen said that inflation was "temporary", Powell used the words "no recession". The opposite happened in both of these instances. I hope it won't be like that this time.
CBRT'S INFLATION FORECAST
Another important development we followed on Thursday was the CBRT's Inflation Report. In the report, we saw that the CBRT updated its inflation forecast for the end of 2022 from 42.8% to 60.4%. In addition, the year-end food inflation forecast was updated from 49% to 71.3%.
Considering that the inflation rate in December 2021 was 36.08%, the forecast of 60.4% for the end of the year can be considered as balanced. However, considering the possible course of developments in exchange rates and global energy prices until the end of the year, it is highly likely that an upward revision will be made in the next inflation report.