The US economy could be heading into a recession next year as persistently high inflation and an increasingly hawkish Federal Reserve weigh on growth.
Greg Daco, chief economist at EY-Parthenon, warned in a new analyst note that the odds of a US economic slowdown over the next year are between 35% and 40%.
The risk of a global slowdown is even greater.
“A US recession is unlikely in the very near term, but there are several uncertainties on the horizon,” Daco wrote. “While I put the odds of a US recession at 35-40% over the next 12 months, the odds of a major slowdown in global growth are close to 100% over the next six months. “
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As the U.S. economy remains strong in the meantime, “cracks are beginning to appear in the foundations,” he wrote. Skyrocketing inflation, rising interest rates and depressed financial markets are expected to weigh on consumer spending in the coming months. Consumer spending accounts for about two-thirds of gross domestic product, the broadest measure of domestically produced goods and services.
“With the Fed tightening the monetary policy tap with increased resolve and the global economic outlook becoming gloomier, the U.S. economy will become more susceptible to a downturn in the months ahead,” Daco wrote.
Economic growth in the United States is already slowing. The Bureau of Labor Statistics reported earlier this month that gross domestic product unexpectedly shrank in the first quarter of the year, marking the worst performance since spring 2020, when the economy was still in the grip of the COVID-induced recession.
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The analysis comes amid growing fears on Wall Street that the Fed could drag the economy into a recession as it seeks to rein in inflation, which soared 8.3% in April, nearly a high of 40 years. Bank of America, along with Fannie Mae and Deutsche Bank, are among Wall Street firms predicting a downturn over the next two years, along with former Fed Chairman Ben Bernanke.
“The Fed is trying to thread the needle while wearing boxing gloves and a mouth guard, which reduces its degrees of freedom to act without causing damage to the real economy,” the economist said. RSM chief Joe Brusuelas who questioned whether the central bank would be able to pull off a soft landing.
Policymakers raised the benchmark interest rate by 50 basis points earlier this month for the first time in two decades and signaled that further rate hikes of a similar size are on the table in upcoming meetings. as they race to catch up with inflation.
Fed Chairman Jerome Powell acknowledged there might be some ‘pain associated’ with lower inflation and curbing demand, but pushed back on the idea of a looming recession, pinpointing the labor market and heavy spending consumption as positive points of the economy. Still, he warned that a soft landing is not assured.
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“It will be a difficult task, and it has been made more difficult over the past two months due to world events,” Powell said Wednesday during a Wall Street Journal live event, referring to the war in Ukraine. and COVID lockdowns in China.
But he added that “there are a number of plausible pathways to having a soft or soft landing. Our job is not to handicap the odds, it’s to try to achieve that.”
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