Goldman Sachs doubles the chances of the US entering a recession in the next year
Economists at Goldman Sachs have doubled the odds of the US economy sliding into recession in the coming year as they lower their growth outlook amid concerns about inflation and interest rates.
“We now see the recession risk as higher and more forward-looking,” Goldman Sachs chief economist Jan Hatzius wrote in a note Monday, raising the chance of a recession in the next 12 months to 30 percent, up from 15 percent.
“We are increasingly concerned that the Fed will feel compelled to respond strongly to high inflation expectations and consumer inflation expectations if energy prices continue to rise, even if activity slows sharply,” the note added.
The bleak forecast comes about a week after the Federal Reserve implemented its largest rate hike since 1994 to stem a continued rise in inflation.
The benchmark S&P 500 is down more than 23% so far this year. Economists at Goldman Sachs have doubled the odds of the US economy falling into recession in the coming year
Goldman Sachs sees a 30% chance that the US economy will enter a recession in the coming year, up from the earlier forecast of 15%
Goldman Sachs also lowered its estimates of US GDP for the next two years below consensus to reflect the negative impact of higher borrowing costs on the economy.
Goldman economists maintained their forecast of 2.8 percent growth for the current quarter. But for the third and fourth quarters, they lowered their forecasts to 1.75 percent and 0.75 percent, respectively. They expect growth of only 1 percent for the first quarter of 2023.
“The Fed has been more aggressive in pre-loading rate hikes, expectations for final interest rates have risen and financial conditions have tightened further, implying a significantly greater drag on growth — slightly more than we think is necessary,” Goldman economists said. in the note.
Goldman Sachs predicts a conditional 25 percent chance that the United States will enter a recession by 2024 if it avoids one in 2023.
This meant there was a 48 percent cumulative chance of a recession in the next two years, compared to the investment bank’s previous forecast of 35 percent.
However, the note predicted that a possible recession would probably not be severe.
‘Without major imbalances to resolve, a recession caused by a moderate tightening would likely be shallow, although even less deep recessions average the unemployment rate by about 2½pp. has risen,” Goldman economists wrote.
Federal Reserve board chairman Jerome Powell prepares for a news conference after the Fed decided to raise interest rates by three-quarters of a percentage point
Federal Reserve rolled out its biggest rate hike since 1994 last week to counter a sharp rise in inflation
“An additional concern this time around is that the fiscal and monetary policy response may be more limited than usual.”
It comes amid other warning signs of an impending recession after US GDP contracted unexpectedly in the first quarter, partly due to a wider trade deficit.
A second consecutive quarter of contracting GDP would confirm the classic definition of a recession. GDP data for the second quarter will be released in early August.
Earlier this month, the CNBC CFO Council Survey found that 68 percent of CFOs who responded to the survey predicted a recession will occur in the first half of 2023.
No CFO predicted a recession later than the second half of next year, and no CFO surveyed thinks the economy will avoid a recession.
The US economy contracted unexpectedly in the first quarter, falling 1.5 percent, partly due to a widening trade deficit
In April, consumer prices rose 8.3 percent from a year earlier, just below the fastest increase in four decades, a month earlier
Also Jaime Dimon, CEO of JPMorgan Chase, recently issued a stark economic warning, saying that rising commodity prices and tightening monetary policy could be a “hurricane” blow to the US economy.
Speaking at a New York banking conference earlier this month, Dimon warned the investor-analyst meeting, “You’d better brace yourself.”
“I said there were storm clouds there, big storm clouds, but it’s a hurricane,” the US banking giant said.
“Right now it’s a bit sunny, it’s going well, everyone thinks the Fed can handle this. That hurricane is over there, on the road, coming our way. We just don’t know if it’s a small or Super Storm Sandy,” he added.
“JP Morgan is bracing us and we will be very conservative with our balance sheet,” he said.
Last week, the Fed raised interest rates three-quarters of a percentage point to a range of 1.50 percent to 1.75 percent, and now predicts borrowing costs will more than double from that level in the next six months.
Fed Chair Jerome Powell said he expects an increase of 50 or 75 basis points in July.
Higher interest rates are the Fed’s main tool to curb inflation, which hit a new all-time high of 8.6 percent in four decades in May.
But raising interest rates also puts a brake on growth and increases the risk of a recession.