According to economists at JPMorgan Chase, the global economy faces four likely scenarios – none particularly large – although there is a 1 in 5 chance a recession will not take hold. In the company’s most likely case, the United States is likely to experience a contraction in the latter part of 2023. Other possible outcomes are a recession late next year or in 2024. In the worst case case, the economy tips into recession in early 2023. “Circumstances warrant consideration of a range of scenarios,” JPMorgan chief economist Bruce Kassman and others wrote in a report for clients. . “The dominant event in all four scenarios presented is a U.S. recession before the end of 2024. But the timing of this pause, the trajectory of Fed policy, and the implications for the rest of the world vary.” It all depends on how the tightening of monetary policy by the Federal Reserve and other global central banks plays out. The Fed and its counterparts have raised benchmark interest rates dozens of times this year in a bid to control inflation to its highest level in four decades. JPMorgan’s most likely case, with a 32% chance, sees a recession set in about a year from now, with the lagged impact of tighter monetary policy gradually eroding growth. “While avoiding a near-term recession, our baseline scenario assumes the United States enters a mild recession at the end of 2023,” the company said. “This scenario puts the construction slowdown on U.S. credit conditions and the rising dollar at the center of the outlook.” Kassman and his team expect the fed funds rate to hit 5% in 2023, roughly in line with market prices. Rising interest rates have led to a strengthening of the dollar, which is up around 12% since the start of the year against a basket of its global peers. This monetary trend has in turn seen the inflation of US exports to other countries that hold large amounts of dollar-denominated debt. In the second most likely scenario, JPMorgan assigns a 28% probability of no recession through 2024. The event is delayed in hopes that a Fed pause in rate hikes will coincide with a decline inflation and resilient growth. However, the optimistic outlook does not materialize. “The hope behind the pause – that the restrictive stances will gradually bring inflation back to comfort zones – has not materialized,” Kassman wrote. “With high inflation entrenched, policy rates will need to rise significantly further and a global recession will set in in 2024.” The other two scenarios have equal probabilities of 20%. The first is that the “damages [is] already done” and the global economy is heading for contraction. This is the least positive set of circumstances. “There is enough support to avoid a recession in early 2023, but we think that would be a mistake. to ignore the risks associated with the tightening of financial conditions and the weakness of Europe [and] in China,” Kassman said. “We see a one-fifth risk that the United States will break with Europe and pull the global economy down early next year.” Finally, the outlook more encouraging are still 20% chance of a “soft landing” “We believe it is a mistake to exclude a soft landing scenario (20% probability) in which recession is avoided”, indicates the note. “In this scenario, sluggish growth and the lifting of supply-side constraints are enough to lower inflation towards 2% without a sharp deterioration in labor markets. With growth at a modest pace, central banks can begin to normalize policy stances in late 2023, laying the groundwork for a prolonged global expansion.” JPMorgan isn’t the only forecasting firm on Wall Street that sees at least a reasonable chance that the Fed can keep the economy out of recession Over the weekend, Goldman Sachs also released an outlook in which it said the economy should experience a “soft” landing or “gently”, although he expects GDP growth of only around 1% next year.
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