Economists at Goldman Sachs now see a growing risk of a U.S. recession. They explain, “If energy prices rise further, the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations, even if activity declines sharply.”
Goldman Sachs on the increasing risk of recession
Goldman Sachs economists, led by chief economist Jan Hatzius, explained in a note Monday that the global investment bank has revised down its growth forecast for the U.S. economy and warned of a growing risk of recession, according to a Bloomberg report.
The Goldman Sachs economist wrote:
“The main reason,” they added, “is the lower growth path of our baseline.” They are increasingly concerned that “even if activity slows sharply, if energy prices rise further, the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations. Last week, the Federal Reserve approved the largest interest rate hike since 1994.
Goldman’s research team now sees a 30% probability that the U.S. economy will enter a recession over the next year, up from 15% previously. Furthermore, if a recession is avoided in the first year, they see the conditional probability of a recession in the second year at 25%. In other words, the cumulative probability over the next two years will be 48%, up from the previous 35%, he announced.
In April, Hatzius estimated for its clients “a recession probability of about 15% in the next 12 months and 35% in the next 24 months.”
The Goldman economist continued, “What would a recession look like?”
“A recession caused by moderate tightening intensity would most likely be shallow, since there are no major imbalances to unwind, but an even shallower recession would see the unemployment rate rise by about 2.5 percentage points on average.”
An additional concern this time around is that fiscal and monetary policy responses may be more limited than usual.
Earlier 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 businesses and consumers to prepare for a US recession.
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