Goldman Sachs Sees Higher U.S. Recession Risk Citing Concerns the Fed Will ‘Respond Forcefully’ to High Inflation
Goldman Sachs’ economists, led by chief economist Jan Hatzius, explained in a note Monday that the global investment bank has cut its growth forecasts for the U.S. economy, warning that the risk of a recession is rising, Bloomberg reported.
The Goldman Sachs economists wrote:
We now see recession risk as higher and more front-load.
“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 forcefully 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.
The Goldman research team now sees a 30% probability of the U.S. economy entering a recession over the next year, up from 15%.
In addition, the firm sees a 25% conditional probability of a recession in the second year if one is avoided in the first.
That implies a 48% cumulative probability in the next two years versus 35% previously, the publication conveyed.
In April, Hatzius told clients that the firm estimated “the odds of a recession as roughly 15% in the next 12 months and 35% within the next 24 months.”
“What might a recession look like?” the Goldman economists continued.
“With no major imbalances to unwind, a recession caused by moderate overtightening would most likely be shallow, though even shallower recessions have seen the unemployment rate rise by about 2.5 percentage points on average.”
They cautioned:
One additional concern is that the fiscal and monetary policy response might be more limited than usual.
Early this month, Goldman Sachs President and COO John Waldron warned of unprecedented economic shocks and tougher times ahead.
In May, Senior Chairman and former CEO Lloyd Blankfein advised companies and consumers to prepare for a U.S. recession.
Goldman Sachs raises the probability of U.S. recession in 2023 to 30%
Goldman Sachs sees a 30% chance of the U.S. economy tipping into recession over the next year, up from its previous forecast of 15%, amid record-high inflation and a weak macroeconomic backdrop fueled by Russia’s invasion of Ukraine.
The latest forecast comes about a week after the U.S. Federal Reserve rolled out its biggest rate hike since 1994 to stem a surge in inflation and as several other central banks also took aggressive steps to tighten monetary policy.
Goldman Sachs also downgraded its U.S. GDP estimates below consensus for the next two years to reflect the drag on the economy.
“The Fed has front-loaded rate hikes more aggressively, terminal rate expectations have risen, and financial conditions have tightened further and now imply a substantially larger drag on growth — somewhat more than we think is necessary,” Goldman’s economists said in a note from late-Monday.
Goldman Sachs forecast a 25% conditional probability of the United States entering a recession in 2024 if it avoids one in 2023, adding that this meant that there was a 48% cumulative probability of a recession over the next two years compared to its prior forecast of 35%.
“We are increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply,” it added.
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