Qatar National Bank (QNB) confirmed that the negative growth rates of three US production sectors, which are services, manufacturing, and construction, indicate an upcoming recession and a “soft decline”.
The bank indicated in its weekly report that the direction of the US economy is one of the controversial issues, as there is no consensus on whether it will enter into a complete or slight recession, or it will avoid recession completely, considering that the general picture is unclear, despite the strong headwinds, in light of the indicators that It still indicates the flexibility of the economy.
The report believed that the occurrence of an economic recession is not entirely excluded, as questions related to the imminent slowdown still remain.
He said in a related context: “A recession is officially declared by the National Bureau of Economic Research, when there is a significant decline in economic activity that continues for more than a few months, and is spread across all sectors of the economy.”
The report discussed expectations of a slowdown from the perspective of 3 productive sectors, which are services, manufacturing, and construction, as it confirmed that the services sector is still flexible in general, despite the gradual decline, indicating that the latest release of the PMI data indicates a development, as it provides an assessment of the extent of improvement. or a decline in economic activity.
The level of 50 points in the index is considered a dividing line between contraction (less than 50 points) and expansion (above 50 points) in business conditions, and the services sector purchasing managers’ index, during the strong recovery in 2021, reached its peak at 67.6 points, then continued its downward trend until Latest readings, this year’s issues until last May remained above 50 points, and is still considered in the expansion area.
The services sector acts as a stabilizing factor in the continuous adjustment process in the economy in general, compared to other sectors, and the sector shows smoother changes in the business cycle, as well as more moderate reactions to changes in monetary policy, because the consumption of services depends less on financing, which It makes it less vulnerable to interest rates. In addition, families do not like to make large adjustments to the consumption of services, and a clear example of this is health and education. Conversely, households may postpone purchases of durable goods, such as cars and home appliances, when economic conditions deteriorate or financing costs rise.
The report believed that the services sector has an additional opportunity for growth in the future, as consumption has not yet recovered to its pre-COVID-pandemic levels.
The services sector is essential to the performance of the US economy, as it represents more than 75 percent of output, and employs more than four out of every five workers in the private sector. Therefore, smooth adjustment in this sector is fundamental to the quality of economic dynamics. In other words, the elasticity of consumption in the services sector means that there is less chance of a sharp economic slowdown.
With regard to the state of the manufacturing sector, the report indicated that it is in a contractionary state, and is heading for further weakness, indicating that the sector’s purchasing managers’ index began to decline, after it reached its peak at the level of 63.8 points in March 2021, outperforming the services sector, and remained in the deflationary zone. Since November 2022.
The bank stated that this is partially explained by the transmission of the impact of higher interest rates on investments, while fixed investment growth has remained negative for four consecutive quarters since the second quarter of 2022. In sharp contrast to the services sector, commodity consumption significantly exceeded its trend during the pandemic, which means That there is still a possibility of a further decline until consumption is normalized.
On the other hand, the report predicted that the construction sector would witness a state of stagnation, as high interest rates and tightening lending standards increased borrowing costs and reduced the availability of credit, in addition to that low loan-to-value ratios mean that borrowers have to use more of their real estate equity To get a mortgage.
In this context, he pointed out that real estate financing has become more expensive for potential buyers, and it has also become more difficult to obtain, which negatively affects the construction sector, pointing out that building permits have shown negative growth since August last year, with an average this year so far of 22.9. percent.
