Despite Inflation Slowdown... US Economist Says 61% Chance of Recession This Year

[Asia Economy New York=Special Correspondent Joselgina] American economists still see the probability of a recession occurring within a year as exceeding 60%. Despite signs of easing inflation, the central bank, the Federal Reserve (Fed), is expected to maintain high interest rates for the time being, and three-quarters of respondents predicted that a 'soft landing' would be difficult to achieve this year.

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The Wall Street Journal (WSJ) reported on the 15th (local time) that the average response to the question of the 'probability of a recession within the next 12 months' in a survey of U.S. economists was 61%. This is almost the same level as the 63% recorded in the survey conducted in October last year. Despite recent signals of easing inflation, economists in the U.S. still see a high possibility of a recession this year.

WSJ stated, "A figure in the 60% range is historically high, excluding actual recession periods," and added, "Economists still expect that high interest rates will push the U.S. economy into a recession this year." The average response a year ago in January was only 18%. It was 38% in December 2007, just before the global financial crisis, and 26% in February 2020, just before the COVID-19 outbreak.

Economists forecast that the consumer price index (CPI) inflation rate, which has recently shown signs of easing, will fall to 3.1% by the end of this year. The CPI inflation rate in December last year was 6.5%, showing a clear slowdown from 9% in June last year. The year-end forecast of 3.1% is slightly lower than the 3.3% expected in the October survey last year. It is expected to ease further to 2.4% by the end of 2024.

Three-quarters of respondents said that a soft landing by the Fed would be difficult. Economic outlooks were also downgraded. However, economists predicted that while avoiding a recession would be difficult, such a recession would be relatively shallow and short-lived. The U.S. GDP growth rate for the first quarter was forecast at an annualized 0.1%. It is expected to contract by 0.4% in the second quarter, remain flat at 0% in the third quarter, and grow by 0.6% in the fourth quarter. Accordingly, the annual growth rate for 2023 is expected to be only 0.2%. In the same survey conducted in October last year, economists had projected a growth rate of 0.4% for this year.

Brett Ryan, an economist at Deutsche Bank, said, "Recent inflation indicators have shown some progress, but some indicators such as services are related to the (overheated) labor market, suggesting that the Fed still has a long way to go," adding, "The Fed will maintain its tightening stance to restore balance between the labor market and price stability, which will eventually lead to higher unemployment and a recession." Greg Daco, chief economist at EY-Parthenon, also mentioned the recent weakness in the housing market and manufacturing, stating, "The persistence of inflation, tight financial conditions, and global growth slowdown will combine to push the U.S. into a mild recession in the first half of this year."

Economists cited high inflation and the Fed's tightening stance as the biggest risks this year. They also forecast that the Fed will raise interest rates to the 5% range this year. The Fed's own dot plot projects the year-end benchmark interest rate to be between 5.0% and 5.25%, which is 0.75 percentage points higher than the current level. The Fed is expected to continue raising rates at the Federal Open Market Committee (FOMC) meeting scheduled for January 31 to February 1.