The US economic cycle could soon turn according to Swiss Re

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As part of a new report, analysts at Swiss Re have said insurers should be prepared for the possibility of the US economic cycle turning around soon, with market indicators currently sending mixed signals about the state of the economy. .

The reinsurer notes that a tight labor market, inflation and financial market positioning suggest end-of-cycle conditions, although other indicators are more consistent with an early or mid-cycle.

A tight labor market risks accelerating the US Federal Reserve’s rate hike, which could worsen the already expected economic slowdown and end the current cycle.

It is therefore possible that the United States is behind in the economic cycle, although Swiss Re says this does not mean that a recession is imminent.

Analysts identify the US jobs boom as a factor that has increased confusion about the economy’s position in the business cycle.

Tensions in the labor market are leading to wage increases and broader inflation, forcing the Fed to tighten policy, and there is now a high risk of an acceleration in policy rate hikes and/or quantitative tightening that could cause credit and investment conditions for businesses to deteriorate, potentially even ending this economic cycle.

A faster monetary tightening response from the Fed to rising inflation and tightening labor markets would likely lead to a contraction in credit issuance, leading to a reduction in lending that would weigh on economic growth.

“We have long expected growth to slow in the second half of 2022 as the re-opening demand surge and fiscal stimulus wind down,” says Swiss Re. “Accelerated monetary tightening would exacerbate this expectation, adding further downside risk to our below-consensus growth forecast.”

There is also a risk that existing vulnerabilities in financial markets will amplify late-cycle momentum into a full turn in the economic cycle as the Fed tightens monetary policy, analysts warn.

Rising interest rates could weaken a stock market reported as overvalued and vulnerable to downside risk, increasing the cost of capital and reducing market confidence.

“While not our base case, any or all of these vulnerabilities, if triggered by monetary tightening, could amplify a downturn at a turning point in the economic cycle,” Swiss Re concluded.

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