DNA Explainer: Is US on the brink of recession? What it means for the world

Is the United States heading for a recession? If Goldman Sachs Senior Chairman Lloyd Blankfein is to be believed, then the chances are 'very, very high'. The investment banker and former Goldman Sachs CEO made the comment urging companies and consumers to prepare for a US recession, saying it's a 'very, very high risk'.

However, he showed his faith towards Federal Reserve saying it is 'responding well' to the situation. Recession happens when there is two consecutive quarters of declining Gross domestic product (GDP). The United States is now facing rising interest rates on the back of high inflation.

Read | India should reconsider its decision to restrict wheat exports: USA

Why is it said that US is heading towards recession?

Federal Reserve recently raised interest rates for the first time since 2018, to a range of 0.25% to 0.50%.

Federal Reserve suggested that the federal funds rate could climb to 2.5% or higher by the end of 2022.

In forecasts released with the rate decision, economists lowered growth projections for the year.

The yield curve (graph) inverted on March 29, this year for the first time since 2019. 

This happens when short-term treasury bills attract higher interest rates than longer-term treasuries.

This is a sign that investors are losing confidence in the economy.

The Conference Board, US has forecast that real GDP growth will slow to 1.5% in the first quarter of 2022.

This real GDP will be down sharply from 6.9% growth in the last quarter of 2021. 

White House is confident of strong GDP growth in 2022 despite inflation risks and IMF also shares that optimism.

The International Monetary Fund estimate a 3.7% GDP growth this year for the United States.

What led to this state?

With high fuel prices, the US consumer sentiment declined in early May to the lowest level since 2011.

US consumer prices rose 8.3% in April from a year ago, slowing slightly from March but still among the fastest rate in decades.

Given the high rate of inflation, especially in oil and food, consumers will be forced to cut their spending to compensate. 

Small business owners say inflation is their biggest concern, next only to supply chain disruptions, pandemic and labour shortages.

A majority of small business owners say they're currently experiencing a rise in the cost of their supplies.

How bad it is for the world

This comes at a time when the world is already going through economic crisis due to ongoing Russia Ukraine war.

On one side there is scarcity of essential items like wheat, coal and other food grains, fuel and gas price are also at an all time high.

Economies, specially of developing countries have not fully recovered from the effects of the two-year-long Covid-19 pandemic.

Sri Lanka is battling its worst ever economic crisis since its independence on February 4, 1948.

Natural gas prices have almost doubled since the beginning of this year and US recession could further enhance it.