As America sneezes, the world shivers: why we should brace for a US recession

Fear stalks the world’s markets. A smorgasbord of American economic data, delayed by the recent federal government shutdown, is due, and investors are deeply anxious about what it may reveal – namely, that the US economy appears to be on the brink of recession.

Amid concern that the AI bubble might finally be popping, there was a global sell-off of tech stocks. The plummeting of stocks in the US and Asia was underlined by Bitcoin, which had recently soared to new highs, dropping 28 per cent in a day, to a seven-month low.

That hoary old cliché – “when America sneezes, the rest of the world catches a cold” – echoes in the decidedly chilly November wind. It is not something those responsible for steering UK plc want to hear, especially while navigating thick economic soup with a tax-raising Budget on the way.

America is sneezing loudly. Christopher Waller, a member of the US Federal Reserve board, made this clear in a speech at the annual dinner of the Society of Professional Economists in London.

Waller, a long-time advocate of the interest-rate cuts Donald Trump has campaigned for and a candidate to replace Fed chair Jerome Powell, delivered a stark warning about the “eye-popping” corporate layoffs coming stateside.

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“Such announcements are anecdotes and may not yet be fully reflected in initial unemployment claims,” Waller said. But if he is right, they soon will be.

He believes there are enough private indicators for him to form a view, even while official statistics remain on hold. From unemployment figures to declining consumer sentiment, the outlook is far from optimistic.

Waller’s enthusiasm for cutting rates to boost the US economy is not universally shared. Inflation hit 3 per cent in October – the first time since January – enough to stir the rate hawks on the Federal Open Market Committee. Waller will vote for a cut, but markets worry there aren’t enough doves like him to prevail.

Trump’s tariffs have, so far, had only a limited impact on prices. US businesses reliant on overseas raw materials, parts, or foreign products are absorbing the costs – but only to a point.

Google CEO Sundar Pichai had only added fuel to the fire, warning of an “overshoot” by big tech, likening it to the early internet that led to the dot-com bust. He cautioned against “irrationality” in the AI boom, which has seen billions of dollars poured into the sector.

“I think no company is going to be immune, including us,” he warned, if the AI bubble bursts. And we may – may – be seeing the early stages of that scenario. There will be blood on the floor if he is right.

The inevitable sell-off began on Wall Street, spread through Asia, and reached Europe, rattling even London’s traditionally steady market, often seen as a safe haven due to its lack of tech exposure and reliable dividend-paying companies.

The US economy posted a strong second quarter after contracting in the first. We are still waiting on third-quarter data, delayed by the shutdown, but it is expected to show a slowdown.

To qualify as a recession, an economy must record two consecutive quarters in the red. Even if the US third quarter proves negative, the fourth may rebound as government employees return to work.

Yet technical definitions matter little if America is slowing. The ripple effects will be felt globally. China, the world’s second-largest economy and a key competitor, is also struggling, likely worse than official figures suggest.

Concerns about the reliability and transparency of data the Chinese government releases have been raised, including by the International Monetary Fund (IMF).

Regardless of the official claims, it is clear that China is currently struggling, grappling with challenges including the on-off trade war with the US and, domestically, a property market in a full-scale crisis, with banks fretting over potential defaults and searching for a way to avoid catastrophe. There may be no easy solution to whether loans should be called in.

The problems extend far beyond the US. Bitcoin has been sliding, and in Britain, Rachel Reeves has reportedly shelved an income-tax rise, honouring her manifesto pledge not to burden working people – partly due to forecasts suggesting the UK’s relative resilience. But can it withstand a global meltdown? We might soon find out (PS: probably not).