By Jim Held
Fears of an economic recession next year are increasing in both the U.S. and abroad:
- The Federal Reserve has been clear that it will do whatever it takes to reduce inflation from its current high levels, so high interest rates should be the norm for now.
- The World Trade Organization is warning of a global recession in 2023, with global trade falling due to high energy prices, rising interest rates and war-related disruptions.
- The so-called “rich countries” club, the OECD, has a similar perspective, stressing that the Russia-Ukraine war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world.
- The private sector is sharing these concerns. For example, over 63% of U.S. manufacturing leaders recently surveyed by the National Association of Manufacturers believed that the U.S. economy would officially slip into a recession in either 2022 or 2023.
Fortunately, supply chain bottlenecks are easing, thereby somewhat reducing inflationary pressures. The Federal Reserve Bank of New York has estimated that global supply chain pressures decreased in September, marking a fifth consecutive month of easing. Also, Flexport data shows that trans-oceanic shipping times are down by about 1/3 since last spring.
But a major potential risk is more severe European fuel shortages this winter, especially for natural gas. A further complication for foreign investors considering the U.S. is the very strong dollar, which raises the cost of converting assets denominated in other currencies into greenbacks.
What are the implications of a recession for foreign companies looking to invest and make a soft landing in the U.S.?
Fortunately, smaller, startup companies have inherent advantages which can help them weather the storm:
- Access to (ideally) patient venture capital that can wait out a downturn
- Typically, smaller payrolls and minimal capital/borrowing costs
- A longer-term focus with an emphasis on navigating change, including a recessionary environment
Especially encouraging is the near-term outlook for the clean energy sector, driven by a perception that climate change is too urgent and too formidable of a problem to delay innovation due to a slower economy.
The new U.S. climate legislation – part of the “Inflation Reduction Act” – will provide $370 billion in climate spending. The new law has plenty of incentives for solar and wind power, but also for emerging technologies such as direct air capture and long-duration energy storage for the grid. In fact, some analysts expect hundreds of new startups to launch due to this historic federal investment.
Meanwhile according to Bloomberg, venture capital funding for climate tech continues to rise, increasing over 60% from 2020 to about $37 billion in 2021. And this trend should only continue as those federal incentives further increase investor confidence.
Recession-proof? Probably not, but the overall outlook for clean energy looks positive. Economists use the term “soft landing” to describe a period of cyclical slowdown in economic growth through higher interest rate policy that avoids recession. Perhaps clean energy is an industry that is well poised for a soft landing for soft landing companies.
Jim Held is a Senior Research Fellow with the Center for International Business Advancement, Binghamton University.