Goldman Sachs on US recession risk, in brief:
30% probability of entering a recession over the next year and a 25% conditional probability of entering a recession in the second year if we avoid one in the first year, implying a 48%cumulative probability at a two-year horizon (vs.35%previously).

Their baseline growth path is now lower. Goldman is 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.

The war and further commodity price shocks have admittedly made the echoes of the 1960s and 1970s ring louder. But Goldman Sachs says they are skeptical that hot wage growth and high inflation expectations are as entrenched today as back then.

The Goldman economists now see a 30% probability of entering a recession over the next year, compared to 15% previously, and a 25% conditional probability of entering a recession in the second year if one is avoided in the first, they wrote in a Monday research note.

That implies a 48% cumulative probability in the next two years compared to a 35% 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.

Meanwhile, BofA Securities’ economists also see roughly a 40 per cent chance of a US recession next year, with inflation remaining persistently high, according to a Reuters report.

They expect US gross domestic product growth to slow to almost zero by the second half of next year “as the lagged impact of tighter financial conditions cools the economy,” while they see just a “modest” rebound in growth in 2024.

BofA Global economists lowered their global growth projections, citing inflation, the war in Ukraine and COVID-related lockdowns in China.

They now expect global economic growth of 3.2 per cent. They said they had forecast 4.3 per cent global growth going into 2022.

US Federal Reserve last week also said, “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The invasion and related events are creating additional upward pressure on inflation and are weighing on global economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks.” 

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