• Inflation forecast to fall, but likely to remain too high to give the all-clear
• US recession by 2024 not the most likely scenario
Twice a year, the Peterson Institute for International Economics (PIIE), a US think tank, publishes a report on the global economic outlook. Looking at the US, demand and production have been “more resilient than expected,” writes Karen Dynan, a member of the PIIE and a professor at Harvard University’s economics department, in a blog post on the results of the current study. As “MarketWatch” writes with reference to a press conference with Dynan, the US job market robust with more than 400,000 new jobs created in the last two months, but consumer spending also remained at a high level. However, the latter is not surprising, since there is still a need to catch up from the pandemic and savings from this period have not yet been used up.
In addition, inflation has probably peaked for the time being. Good fundamental data such as easing supply chains, lower oil prices and general inflation expectations that are not too high would indicate this, quoted the news site Dynan. For the US economy, however, this is not yet cause for celebration. Because even if the PIIE does not expect a recession in the USA or worldwide by the end of 2024, it is forecasting a “forced march” especially for the US economy in the next two years.
High inflation remains a concern
Although inflation appears to have peaked and will come back in the next two years, the PIIE says it is likely to remain high for longer. “Core US consumer spending (PCE) inflation is expected to accelerate from a pace of 4.8 percent in the four quarters of 2022 to 3.9 percent in the four quarters of 2023 and 3.2 percent in the four quarters of 2022 2024,” reads the blog article written by Karen Dynan on the institute’s website. However, this would mean that inflation would remain well above the US Federal Reserve’s target of two percent. Dynan therefore assumes that the Federal Reserve – and also other central banks – the strict monetary policy continue and tighten the reins even further. For example, the Fed will “probably make a few more hikes of 25 basis points” in the key interest rate in order to push inflation towards the target value. However, after the US Federal Reserve’s most recent interest rate decision, the market is currently only expecting a further interest rate hike of 0.25 percent this year and an easing starting in 2024.
While the fallout from the recent banking turmoil should help the Federal Reserve do its job by enforcing stricter lending rules for banks, including to forestall possible regulation, Dynan said, the magnitude of the move is difficult to predict. According to Dynan, the PIIE assumes that tighter lending “is likely to add only a small additional burden to economic activity” and that further interest rate hikes will therefore still be necessary. Overall, the stress in the banking sector is “a negative, but not a big negative,” Dynan said, according to MarketWatch. However, the potential for further turbulence in the banking system increases the negative tail risk for economic activity, according to the blog entry.
US recession rather unlikely despite bank turmoil
Overall, the tight financial conditions would limit economic growth in many countries this year and next. However, for the US it was “based on available information […] below-trend economic growth with some increase in the unemployment rate is more likely than a recession,” Dynan told the PIIE blog. However, downside risks remain “due to the possibility of further contagion among banks, the potential for additional inflationary shocks and the inherent Difficulty getting a soft landing”.
As of this writing, experts at the Peterson Institute for International Economics expect US GDP to be around 1.3 percent higher in 2023 than it was in 2022, and is expected to increase by 1.0 percent in 2024. Economic growth in the USA is therefore likely to remain very meager until at least the end of 2024. “We face a forced march in economic growth until inflation gets closer to the Fed’s target,” the PIIE said. However, when this is likely to be the case is currently not foreseeable.
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