Goldman Sachs economists now see a heightened risk of a US recession. “We are increasingly concerned that the Fed will feel compelled to respond strongly to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” they explained.
Goldman Sachs on the increased risk of recession
Goldman Sachs economists, led by chief economist Jan Hatzius, explained in a note on Monday that the global investment bank has cut its growth forecasts for the US economy, warning that the risk of a recession is rising, Bloomberg reported.
Goldman Sachs economists wrote:
We now consider the risk of recession to be higher and more important.
“The main reasons are that our baseline growth path is now lower,” they added. “We are increasingly concerned that the Fed will feel compelled to respond strongly to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.” Last week, the Federal Reserve approved its biggest interest rate hike since 1994.
Goldman’s research team now sees a 30% chance that the US economy will enter a recession over the next year, up from 15% previously. In addition, the company sees a 25% conditional probability of a recession in the second year if it is avoided in the first. That implies a cumulative probability of 48% in the next two years compared to 35% before, the publication transmits.
In April, Hatzius told clients that the firm estimated “the odds of a recession at about 15% in the next 12 months and 35% in the next 24 months.”
“What would a recession look like?” Goldman economists continued. “Without major imbalances to resolve, a recession caused by moderate over-tightening would likely be shallow, though even the shallowest recessions have seen the unemployment rate rise by about 2.5 percentage points on average.”
An additional concern this time is that the fiscal and monetary policy response could be more limited than usual.
Earlier this month, Goldman Sachs Chairman and Chief Operating Officer John Waldron warned of unprecedented economic crises and tougher times ahead. In May, Senior Chairman and former CEO Lloyd Blankfein advised businesses and consumers to prepare for a US recession.
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