US: How much of a recession risk?

Highlights:

• Persistent inflation overshoots and the Fed’s aggressive normalisation are weighing on the US outlook. After expanding by just above 2% this year, we expect that in 2023 GDP will grow by 0.9% only, with a high likelihood of a slight quarterly contraction during H1. Risks are tilted to the downside.
• Our forecast carries an around 45% risk of a recession next year. Healthy private sector balances may partially offset the impact of tighter financial conditions. Yet, high debt and weak fiscal support may burden the recovery.
• In our baseline scenario, evidence of weakening activity and recession risks will ultimately moderate the Fed’s policy tightening. We see the effective fed funds rate ending the year at 3.1% and peak at 3.4% in Q1 2023.

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