Global growth slows as rates rise

Moderate recession risk looms over US.

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Key takeaways

  • The US economy remains in the late-cycle expansion phase of the business cycle with moderate recession risk.
  • Globally, most economies are facing challenges with growth and inflation. Europe may already be in recession while China is struggling to emerge from its growth recession.

United States

  • The US is in the late-cycle expansion phase with moderate recession risk.
  • The economy is exhibiting late-cycle trends including a tight labor market, declining profit margins, rising inventories, contractionary monetary policy, and an inverted yield curve.
  • Nominal wage growth is the highest in decades, but high inflation has rendered real-wage growth negative and is weighing on consumer confidence.
  • Manufacturing supply-related pressures have started to ease, whereas housing and food inflation remain elevated, suggesting inflation likely will moderate but remain higher than levels experienced in recent decades.
  • Fed hikes have raised the cost of borrowing, especially for mortgage rates.
  • Recent trends suggest a higher probability that the US may move through the business cycle faster than in prior cycles, but near-term recession risks remain moderate.


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  • Most major economies experienced maturing trends in their business cycles due to high inflationary pressures, slowing industrial activity, and tightening monetary and financial conditions.
  • Europe likely has tipped into recession and is particularly exposed to fallout from the war in Ukraine, including higher natural gas prices.
  • China is still struggling to emerge from its growth recession. COVID-related lockdowns have hamstrung the industrial-cycle recovery, but policy easing is picking up steam.
  • While there is some differentiation among other developing and non-US developed markets, most economies are facing challenging stagflationary headwinds due to high commodity prices and the lagging impact of higher interest rates.

Asset allocation outlook

  • The US late-cycle phase warrants smaller active allocation positions with a focus on diversified and disciplined investment strategies.
  • The Fed faces a difficult balance of tightening monetary policy to confront decades-high inflation without prompting a significant downturn.
  • Slower liquidity growth, persistent inflation risk, slowing growth momentum, and greater monetary policy uncertainty raise the odds that market volatility will remain elevated.

Business cycle framework

The business cycle, which is the pattern of cyclical fluctuations in an economy over a few years, can influence asset returns over an intermediate-term horizon. Cyclical allocation tilts are only one investment tool, and any adjustments should be considered within the context of long-term portfolio construction principles and strategic asset allocation positioning.

The diagram above is a hypothetical illustration of the business cycle, the pattern of cyclical fluctuations in an economy over a few years that can influence asset returns over an intermediate-term horizon. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one. * A growth recession is a significant decline in activity relative to a country’s long-term economic potential. We use the “growth cycle” definition for most developing economies, such as China, because they tend to exhibit strong trend performance driven by rapid factor accumulation and increases in productivity, and the deviation from the trend tends to matter most for asset returns. We use the classic definition of recession, involving an outright contraction in economic activity, for developed economies. Source: Fidelity Investments (AART), as of 10/31/22.

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