US heading into shallow recession, no respite from rate hikes yet: Poll

There are already clear signs the economy is slowing, particularly in the US housing market. PHOTO: AFP

BENGALURU - The United States economy is heading into a short and shallow recession over the coming year, according to economists polled by Reuters who unanimously expected the Federal Reserve to go for a smaller 50 basis point interest rate hike on Dec 14.

The Fed has another half-point at least to go with rates early in 2023 with inflation still running well above the Fed’s 2 per cent target even though economists put a steady 60 per cent probability on a recession occuring in the new year.

After raising the federal funds rate 75 basis points at each of the previous four meetings, all 84 economists polled on Dec 2-8 expected the central bank to go for a slightly softer half a percentage point to 4.25 per cent to 4.5 per cent this time.

While the central bank is attempting only to deliver some pain and not a full-fledged downturn, economists, who tend to be slow as a group in forecasting recessions, raised the probability of one in two years to 70 per cent from 63 per cent previously.

That suggests investors and stock markets may have got ahead of themselves with recent optimism that the world’s largest economy may skirt a recession entirely. That is already showing up in safe-haven flows to the US dollar.

“Unless inflation recedes quickly, the US economy still appears headed for some trouble, though possibly a little later than expected. The relative good news is that the downturn should be tempered by extra savings,” said senior economist Sal Guatieri at BMO Capital Markets.

“But this assumes the economy’s durability doesn’t compel the Fed to slam the brakes even harder, in which case a delayed downturn might only flag a deeper one.”

There are already clear signs that the economy is slowing, particularly in the US housing market, often the first to react to tightening financial conditions, and the epicentre of the 2007-08 recession.

Existing home sales have fallen for nine months in a row. And house prices, already in retreat, are expected to drop 12 per cent peak-to-trough and nearly 6 per cent in 2023, a separate Reuters poll showed.

Around 60 per cent of economists who provided quarterly gross domestic product (GDP) forecasts predicted a contraction for two straight quarters or more at some point in 2023.

A large majority of economists – 35 of 48 – said any recession would be short and shallow. Eight said long and shallow, while four said there would not be any recession. One said short and deep.

The world’s largest economy was forecast to grow just 0.3 per cent in 2023, and expand at annual rates well below its long-term average of around 2 per cent until 2024.

Over 75 per cent of economists who answered a separate question said the risk to their GDP forecasts was skewed to the downside.

But with inflation expected to stay above the Fed’s target at least until 2026 and the labour market remaining strong, the bigger risk was rates would peak higher and later than expected.

“With core inflation likely remaining stubbornly high, we now anticipate the current tightening process to continue through Q2 2023,” said Mr Jan Groen, chief US macro strategist at TD Securities, who expected the Fed funds rate to peak at 5.25-5.5 per cent in May.

“There remains a risk of an even higher terminal rate, given the high and sticky rates of core inflation and still strong labour market conditions,” he added.

The US unemployment rate, which has so far stayed low, is expected to climb from the current 3.7 per cent to 4.9 per cent by early 2024. If realised, that would still be well below the levels seen in previous recessions. REUTERS

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