Goldman warns US recession risk now higher and more front-loaded

HONG KONG – Goldman Sachs Group economists warned the risk of a US recession has grown more likely, and have downgraded their gross domestic product growth (GDP) forecasts for the economy.

The Goldman economists now see a 30 per cent probability of entering a recession over the next year, compared to 15 per cent previously, and a 25 per cent conditional probability of entering a recession in the second year if one is avoided in the first, they wrote in a research note on Monday (June 20). That implies a 48 per cent cumulative probability in the next two years compared to a 35 per cent estimate previously.

“We now see recession risk as higher and more front-load,” economists led by Jan Hatzius wrote in the note. “The main reasons are that our baseline growth path is now lower and that we are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.”

Seeking to quell the surge in living costs, the US Federal Reserve accelerated its monetary-tightening campaign last week, executing the biggest interest-rate hike since 1994.

While comparisons with the 1960s and 1970s are ringing louder, the Goldman economists said hot wage growth and high inflation expectations are less entrenched today as back then.

“What might a recession look like? With no major imbalances to unwind, a recession caused by moderate overtightening would most likely be shallow, though even shallower recessions have seen the unemployment rate rise by about 2½percentage points on average,” the Goldman economists wrote. “One additional concern this time is that the fiscal and monetary policy response might be more limited than usual.”

While the economists maintained their second quarter growth forecast of 2.8 per cent, they cut their outlook from the third quarter of this year through to the first quarter of 2023, and now forecast growth of 1.75 per cent, 0.75 per cent and 1 per cent, respectively, in each of those quarters.

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