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US: How much of a recession risk?

In Short

Over the last weeks, global growth prospects have worsened significantly. While the direct fallout of the war in Ukraine on the US is relatively limited, high fuel prices dampen consumption. In this context, the Fed vows to fight inflation by raising rates at a speed not seen in the last 40 years.

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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Focal Point I US: How much of a recession risk?
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