Goldman Sachs doubles the chance that the US will go into recession next year

Economists at Goldman Sachs have doubled the chances of the US economy going into recession next year as they downgrade their growth forecasts over concerns about inflation and interest rates.

“We now see recession risk as higher and more front-loaded,” Goldman Sachs chief economist Jan Hatzius wrote in a note Monday, raising the likelihood of a recession in the next 12 months from 15 percent to 30 percent.

“We are increasingly concerned that the Fed will feel compelled to respond strongly to high headline inflation and consumer inflation expectations if energy prices continue to rise, even if activity slows sharply,” the note added.

The grim forecast comes about a week after the Federal Reserve pushed through its biggest rate hike since 1994 to contain a sustained rise in inflation.

Goldman Sachs sees a 30% chance that the US economy will enter recession in the coming year, compared to its previous forecast of 15%

Goldman Sachs also cut its US GDP estimates for the next two years below consensus to reflect the pressure 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. For the first quarter of 2023, they expect growth of just 1 percent.

“The Fed has made more aggressive rate hikes, expectations for final interest rates have risen and financial conditions have tightened further and now imply a significantly larger drag on growth — slightly more than we think is necessary,” Goldman’s economists said in the note.

Goldman Sachs predicts a 25 percent conditional probability that the United States will enter a recession in 2024 if it does not have one in 2023.

This meant there was a 48 percent cumulative chance of a recession over the next two years compared to the investment bank’s previous forecast of 35 percent.

However, the note predicted that any recession would probably not be severe.

“If there are no major imbalances to be ironed out, a recession caused by moderate, too-tight tightening would most likely be superficial, though even smaller recessions have seen unemployment rise on average by about 2½ percentage points,” the Goldman economists wrote. .

Federal Reserve Board Chairman Jerome Powell prepares for a press conference after the Fed decided to raise interest rates by three-quarters of a percentage point

The Federal Reserve last week made its biggest rate hike since 1994 to contain a rise in inflation

“An additional concern this time is that the fiscal and monetary policy response could be more limited than usual.”

It comes amid other warning signs of an impending recession after US GDP contracted unexpectedly in the first quarter, in part due to a widening trade deficit.

A second consecutive quarter of contracting GDP would confirm the classic definition of a recession. Second quarter GDP data 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 year-on-year, just short of the fastest increase in four decades recorded a month earlier

Jaime Dimon, CEO of JPMorgan Chase, also issued a strong economic warning recently, saying that rising commodity prices and tightening monetary policy could deliver a ‘hurricane’ blow to the US economy.

Speaking at a banking conference in New York earlier this month, Dimon warned the gathering of investors and analysts, “You better brace yourself.”

“I said there were storm clouds, big storm clouds, but it’s a hurricane,” the US banking giant said.

“Right now it’s kind of sunny, things are going well, everyone thinks the Fed can handle this. That hurricane is over there, on the road, heading our way. We just don’t know if it’s a small one or Super Storm Sandy,” he added.

“JPMorgan is bracing us and we’re going to be very conservative with our balance sheet,” he said.

Last week, the Fed raised interest rates by three-quarters of a percentage point to a range of 1.50 percent to 1.75 percent, and now forecasts that borrowing costs will more than double from that level over the next six months.

Fed Chairman 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 four-decade high of 8.6 percent in May.

But interest rate hikes also put a brake on growth and increase the risk of a recession.