The risks of the United States and Europe sliding into recession have risen sharply, economists have warned ahead of the G7 summit which begins this weekend in Bavaria.
Economists on both sides of the Atlantic told the Financial Times they had become increasingly pessimistic following the Federal Reserve’s decision to hike rates sharply to counter soaring inflation and growing concerns concerning Europe’s gas supply as winter approaches.
Holger Schmieding, chief economist at Berenberg Bank, said the balance had now “tipped” in favor of an economic contraction next year in the United States and Europe. “What was once an increasing risk has now become the base case.”
Goldman Sachs has doubled the risk that the United States will enter a recession this year from 15% to 30%, with a 48% probability of a recession over a two-year horizon following the first rise of 75 points in Fed base since 1994 .
“The risks of recession in the United States are uncomfortably high and growing. I would put them at 40% over the next 12 months, and more or less even over the next 24,” said Mark Zandi, chief economist at Moody’s Analytics. He added that Europe was even more vulnerable.
“To avoid recession, the global economy needs some luck and for the economic fallout from the coronavirus pandemic and Russian aggression to subside quickly, as well as shrewd policies from the Fed. and other central banks,” Zandi said.
G7 leaders will discuss the state of the global economy during their working lunch on Sunday, with inflation expected to dominate the proceedings. Ukrainian President Volodymyr Zelenskyy will participate remotely via video link in the talks on Monday, which will focus on the crisis caused by the war in Russia.
The global economic outlook has darkened since Russia’s invasion of Ukraine in February sent energy and food prices skyrocketing. During the month of June, central banks from Washington to Zurich raised rates by wider margins than expected by markets, signaling that they would do whatever it took to rein in soaring inflation, even if that meant triggering a recession.
Europe’s gas supply has become more uncertain following Russia’s decision to cut off flows to many countries. Supply chain disruptions resulting from China’s zero-tolerance policies continue to weigh on growth prospects.
The Fed’s hike prompted private sector economists to revise their U.S. forecasts for 2023 down by the widest margin so far this year, with even bigger downgrades than those made at the start of the week. war in Ukraine, according to Consensus Economics, which tracks growth and inflation forecasts.
Peter Hooper, a Deutsche Bank economist and former Fed official who in April became one of the first on Wall Street to predict a recession, warned that the near-term inflation picture “doesn’t look good. “, which means that the central bank may need to raise rates even more aggressively than currently expected. The bank has since postponed its call for contraction until the middle of next year. “It will be extremely difficult to refine this to the point of bringing inflation down with only a half percentage point increase in unemployment over the next two years,” he said.
Economists also sharply cut their 2023 outlook for the eurozone, the UK and eight in 10 other countries and regions tracked by Consensus Economics.
Neil Shearing, chief economist at Capital Economics, said recession risks are highest in Europe, where the inflation-induced cost-of-living crisis is associated with possible gas shortages. As in the US, the UK and the Eurozone are also facing inflation at multi-decade highs.
The International Energy Agency warned this week that Europe must prepare immediately for a complete shutdown of Russian gas exports this winter.
Martin Wolburg, senior economist at insurer Generali, said: “If Russia were to completely cut gas supplies to the EU, a eurozone recession would become the new baseline scenario, with the German economy particularly hard hit. “.
Katharina Utermöhl, senior economist at insurer Allianz, was more optimistic: “The strong post-lockdown rebound in the sectors most affected by the pandemic – notably travel and hospitality – should maintain the economy of the euro zone afloat during the summer months”.
In the UK, the Bank of England is expected to raise rates even though it expects the economy to stagnate over the next two years. “The big picture is that the economy may be only slightly bigger this time next year than it was before the pandemic,” said Thomas Pugh, economist at RSM UK, a research firm. taxation and advice.
Official sector forecasts from central banks and multilateral organizations such as the OECD and IMF continue to show that the world’s major advanced economies will experience growth this year and next.
However, Fed Chairman Jay Powell this week acknowledged in congressional hearings that a US recession was “certainly a possibility”, while promising that the central bank’s commitment to restoring price stability is “unconditional”.
Additional reporting by Guy Chazan in Berlin