Recession in US and Europe ‘increasingly likely’, economists warn

The risks of the US and Europe slipping into recession have risen sharply, economists warn ahead of the G7 summit starting this weekend in Bavaria.

Economists on both sides of the Atlantic told the Financial Times that they had become increasingly pessimistic after the Federal Reserve’s decision to press ahead with significant rate hikes to curb rising inflation, and mounting concerns about Europe’s gas supply in the United States. the run-up to winter.

Holger Schmieding, chief economist at Berenberg Bank, said the balance was now “swayed” in favor of an economic contraction next year in the US and Europe. “What used to be a rising risk has now become the base case.”

Goldman Sachs doubled the risk of the US slipping into recession this year from 15 percent to 30 percent, with a 48 percent chance of a recession over a two-year horizon in the wake of the Fed’s first 75 basis point hike since 1994 .

“The recession risks in the US are uncomfortably high and mounting. I would put them at 40 percent in the next 12 months, and more or less equal opportunity in the next 24,” said Mark Zandi, chief economist at Moody’s Analytics. that Europe was even more vulnerable.

“To avoid a recession, the global economy needs a bit of luck and wants the economic fallout from the coronavirus pandemic and Russian aggression to come to an end quickly, along with some deft policymaking by the Fed and other central banks,” Zandi said. .

G7 leaders will discuss the state of the global economy over their Sunday working lunch, with inflation dominating proceedings. Ukraine’s President Volodymyr Zelenskyy will participate remotely via video link in Monday’s talks, which will focus on the crisis caused by the war in Russia.

The global economic outlook has turned bleak since the Russian invasion of Ukraine in February sent energy and food prices soaring. Over the course of June, central banks from Washington to Zurich raised interest rates at wider margins than markets had anticipated, signaling that they would do everything they could to stem rising inflation — even if it sparked a recession.

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Gas supplies to Europe have become more uncertain after Russia’s decision to cut flows to many countries. Supply chain disruptions caused by China’s zero-tolerance Covid policy continue to weigh on growth prospects.

The Fed’s rise prompted private sector economists to lower their US 2023 forecasts by the largest margin this year, with cuts even bigger than those seen at the start of the war in Ukraine, according to Consensus Economics, which said growth and inflation forecasts.

Peter Hooper, a Deutsche Bank economist and former Fed official who was one of the first to predict a recession on Wall Street in April, warned that the short-term inflation picture “doesn’t look good,” meaning the central bank must raise rates even more aggressively than currently expected. Since then, the bank has brought forward its call for contraction to the middle of next year. “It will be extremely difficult to fine-tune this so that inflation will only rise by half a percentage point in the coming years,” he said.

Economists have also sharply lowered their 2023 outlook for the eurozone, the UK and eight in ten other countries and regions tracked by Consensus Economics.

Neil Shearing, chief economist at Capital Economics, said recession risks are greatest in Europe, where the inflation-driven cost of living crisis is coupled with potential gas shortages. As in the US, the UK and the eurozone are also facing multi-decade inflation.

Bar chart of annual % change, by date of forecast, showing Berenberg is one of the banks that has turned gloomier about its outlook

The International Energy Agency warned this week that Europe must immediately prepare for the complete cessation of Russian gas exports this winter.

Martin Wolburg, senior economist at insurer Generali, said: “If Russia completely cut off gas supplies to the EU, a euro area recession would become the new baseline, with the German economy particularly hard hit.”

Katharina Utermöhl, senior economist at insurer Allianz, was more optimistic: “The strong post-lockdown recovery in the sectors most affected by the pandemic – especially travel and hospitality – should keep the eurozone economy afloat during the summer months. ”

In the UK, the Bank of England is expected to raise interest rates, even though it expects the economy to stagnate over the next two years. “The big picture is that by this time next year the economy may be only a fraction bigger than it was before the pandemic,” said Thomas Pugh, an economist at RSM UK, a tax and consultancy firm.

Official sector forecasts from central banks and multilateral organizations such as the OECD and the IMF show that the world’s major advanced economies are still growing this year and next.

However, Fed Chair Jay Powell acknowledged in congressional hearings this week that a US recession was “certainly a possibility” while promising the central bank’s commitment to restore price stability is “unconditional”.

Additional reporting by Guy Chazan in Berlin

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