As part of a new report, analysts at Swiss Re have asserted that insurers should be prepared for the possibility that the US business cycle could turn soon, with market indicators currently sending mixed signals about the stage of the economy.
The reinsurer notes that a tight job market, inflation and financial markets’ positioning suggest late-cycle conditions, despite other indicators being more consistent with early- or midcycle.
A tight labour market risks accelerating the US Federal Reserve’s rate hiking, which could worsen the already-expected economic slowdown and bring the current cycle to an end.
It’s therefore possible that the US is late in the business cycle, although Swiss Re says that this does not mean a recession is imminent.
Analysts identify the US jobs boom as one factor that has heightened confusion about where the economy sits in the business cycle.
Tightness in the labour market is creating wage rises and broader inflation, forcing the Fed’s hand on policy tightening, and there is a high risk now of accelerated policy rate hiking and/or quantitative tightening that could lead to worsening credit and investment conditions for businesses, potentially even ending this business cycle.
A more rapid monetary tightening response by the Fed to rising inflation and tight labour markets would likely contract credit issuance, with the resulting reduction in lending to weigh on economic growth.
“We have long expected a slowdown in growth in H2 2022 as the re-opening demand surge and fiscal stimulus both roll off,” Swiss Re states. “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 could amplify late-cycle dynamics into a full turn of the business cycle as the Fed tightens its monetary policy, analysts warn.
Rising interest rates could weaken an equity market flagged as overvalued and vulnerable to downside risk, raising the cost of capital and reducing market confidence.
“Though not our base case, any or all of these vulnerabilities, if triggered by monetary tightening, could amplify a slowdown into a turn of the business cycle,” Swiss Re concluded.
