Recession 2023: The Looming Threat to Global Economies"

Mixed Economic Signals

April 18, 2023

The US job market appears to be stable, but there are concerns that the economy may head towards a recession in 2023 due to other economic indicators. The Conference Board’s Leading Economic Index has declined by nearly 4% over the past six months, a significant drop that typically indicates a recession. In addition, the treasury yield curve has been inverted since July 2022, suggesting a high probability of a recession by the end of the year.

Despite some positive economic data, the risk of a recession remains a concern for investors. While some indicators suggest the economy is resilient, the risk of a recession is still present.

Federal Reserve’s Efforts to Control Inflation

The Federal Reserve’s efforts to combat rampant inflation that affected the economy in the past year have led to interest rates and inflation concerns. The central bank raised interest rates to control inflation, which has led to a broader economic slowdown affecting the housing sector and manufacturing activity.

A new report suggests that the interest rate increases by central banks may not be enough to bring global inflation back down to pre-pandemic levels. Investors expect central banks to increase international monetary policy rates to almost 4% through 2023, which could leave the global core inflation rate at about 5% that year.

Policymakers’ Focus on Production

Policymakers must shift their focus from reducing consumption to boosting production to achieve low inflation rates, currency stability, and faster growth. This requires generating additional investment, improving productivity, and capital allocation, which is critical for growth and poverty reduction. Failure to do so could lead to long-lasting consequences that devastate emerging markets and developing economies.

Goldman Sachs’ Optimistic View

Goldman Sachs Research estimates a lower risk of a US recession in 2023, with a probability of 35%, in contrast to the consensus estimate of 65%. David Mericle, the chief US economist, and Alec Phillips, the chief US political economist, attribute their more optimistic view to their belief that a continued period of below-potential growth can gradually rebalance supply and demand in the labour market and dampen wage and price pressures with a limited increase in the unemployment rate.

Mericle and Phillips argue that the potential for a recession in 2023 is lower than the consensus estimate of 65%. They suggest that the continued period of below-potential growth can gradually rebalance supply and demand in the labour market and dampen wage and price pressures with a limited increase in the unemployment rate. Moreover, last year’s aggressive Federal Reserve policy’s impact on GDP growth will likely diminish in 2023.

A Contrarian View

Phillips and Mericle also suggest that the jobs-workers gap needs to shrink further to be compatible with sustainable wage growth. They estimate that the jobs-workers gap has fallen from a peak of 5.9 million to 4 million, with all the decline in labour demand so far coming from a decline in job openings rather than in employment. Although this is encouraging, the gap must shrink to 2 million to be compatible with a more sustainable wage rate.

Conclusion

The US job market may be steady, but the risk of a recession in 2023 cannot be ruled out due to other economic indicators. While the Federal Reserve faces challenges in managing inflation and interest rates, policymakers must shift their focus from reducing consumption to boosting production to achieve low inflation rates, currency stability, and faster growth. Investors should monitor various data points to make informed decisions. At the same time, the contrarian view offered by Goldman Sachs Research suggests that a recession in 2023 may not be as likely as previously thought.

FAQ

What is the likelihood of a recession in the US in 2023?

Experts have differing opinions regarding the likelihood of a recession in the US in 2023. While some economic indicators suggest a recession, Goldman Sachs Research estimates a lower risk of a US recession in 2023, with a probability of 35%, in contrast to the consensus estimate of 65%.

What are the economic indicators that suggest a recession?

The Conference Board’s Leading Economic Index has declined by nearly 4% over the past six months. The treasury yield curve has been inverted since July 2022, indicating a high probability of a recession by the end of the year.

What challenges does the Federal Reserve face in managing inflation and interest rates

The Federal Reserve’s efforts to combat inflation have led to interest rates and inflation concerns. The central bank raised interest rates to control inflation, which has led to a broader economic slowdown affecting the housing sector and manufacturing activity. Moreover, a new report suggests that the interest rate increases by central banks may not be enough to bring global inflation back down to pre-pandemic levels.

How should policymakers achieve low inflation rates, currency stability, and faster growth?

Policymakers must shift their focus from reducing consumption to boosting production. This requires generating additional investment, improving productivity, and capital allocation, which is critical for growth and poverty reduction.

What is the contrarian view offered by Goldman Sachs Research?

Goldman Sachs Research estimates a lower risk of a US recession in 2023, with a probability of 35%, in contrast to the consensus estimate of 65%. David Mericle and Alec Phillips, the chief US economists at Goldman Sachs, suggest that the potential for a recession in 2023 is lower than the consensus estimate of 65%. They believe that a continued period of below-potential growth can gradually rebalance supply and demand in the labour market and dampen wage and price pressures with a limited increase in the unemployment rate.