BENGALURU, Dec 9 (Reuters) – The U.S. economy is heading for a short and shallow recession over the coming year, according to economists polled by Reuters who unanimously expected the Federal Reserve to US opts for a lower interest rate hike of 50 basis points in December. 14.
The Fed still has at least half a point to track rates at the start of the new year, with inflation remaining well above the Fed’s 2% target, even as economists forecast a constant 60% probability. % for a recession in 2023.
After raising the fed funds rate by 75 basis points in each of the previous four meetings, the 84 economists polled Dec. 2-8 expected the central bank to opt for a slightly softer half-percentage point. at 4.25%-4.50% this time.
While the central bank is only trying to cause pain and not a full-fledged downturn, economists, who tend to be slow as a group to predict recessions, have raised the probability of a recession in two to 70. % against 63% previously.
That suggests investors and stock markets may have gotten ahead of the curve with optimism over the past month that the world’s largest economy could steer clear of a recession entirely. This is already showing in safe-haven flows into the US dollar.
“Unless inflation recedes quickly, the US economy still appears to be headed for trouble, but perhaps a little later than expected. The relative good news is that the slowdown should be tempered by additional savings” , said Sal Guatieri, senior economist at BMO Capital Markets. .
“But that assumes that the sustainability of the economy doesn’t compel the Fed to apply the brakes even harder, in which case a delayed slowdown might only signal a deeper one.”
Although the federal funds rate is expected to peak at 4.75%-5.00% early next year, in line with interest rate futures, a third of economists, 24 out of 72, expected until it increases.
There are already clear signs of a slowing economy, particularly in the US housing market, often the first to react to tighter financial conditions, and the epicenter of the 2007-2008 recession.
Sales of existing homes (USEHS=ECI) have fallen for nine consecutive months. And house prices, already in decline, are expected to fall 12% from peak to trough and nearly 6% next year, according to a separate Reuters poll.
About 60% of economists, 27 out of 45, who provided quarterly gross domestic product (GDP) forecasts predicted a contraction for two or more consecutive quarters at some point in 2023.
A large majority of economists, 35 out of 48, said any recession would be short and shallow. Eight said long and shallow, while four said there would be no recession. We said short and deep.
The world’s largest economy is expected to grow just 0.3% next year and expand at annual rates well below its long-term average of around 2% through 2024.
More than 75% of economists, 29 out of 38, who answered a separate question said the risk to their GDP forecasts was biased to the downside.
But with inflation expected to stay above the Fed’s target through at least 2026 and the labor market remaining strong, the biggest risk was that rates would peak higher and later than expected.
“With underlying inflation likely remaining stubbornly high, we now expect the current tightening process to continue through the second quarter of 2023,” said Jan Groen, chief U.S. macro strategist at TD Securities, who is expected the fed funds rate to peak at 5.25%-5.50% in May.
“There remains a risk of an even higher terminal rate given the persistently high rates of underlying inflation and the still strong labor market conditions,” he added.
The U.S. unemployment rate (USUNR=ECI), which has remained low so far, is expected to decline from the current 3.7% to 4.9% in early 2024. Should it materialize, it would remain well below the levels seen in previous recessions.
(For more stories from the Reuters Global Economic Survey:)
Reporting by Indradip Ghosh; Poll by Sujith Pai and Swathi Nair; Editing by Ross Finley and Chizu Nomiyama
Our standards: The Thomson Reuters Trust Principles.
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