Interest rates

Recession risk rises as war in Ukraine rages and interest rates rise

Germany’s Deutsche Bank predicted this month that a recession would hit the United States at the end of 2023. Economists interrogates by the Wall Street Journal ranked the odds of a recession over the next 12 months at 28%, down from 18% in January. Investment bank Goldman Sachs said this week that the the chance of a recession in the next two years was 35%. Former Treasury Secretary Larry Summers is more pessimistic, putting the odds at around two-thirds.

“I think the risks of recession are high now,” said Karen Dynan, a Harvard professor and former chief economist at the Treasury Department during the Obama administration. “The highest risk period would be the end of this year until the middle of next year – 30-40% is probably where I would put it.”

Accurately predicting a recession – defined as at least six months in which the economy shrinks instead of expands – is no small feat. And few forecasters at this point are outright saying they think there will be, even though there is broad consensus that US economic growth will slow significantly this year. Fed Chairman Jerome Powell said he’s confident he and his colleagues can get inflation under control without restricting consumer and business spending to the point that the economy shrinks.

“In my view, the likelihood of a recession over the next year is not particularly high,” Powell said in March after the Fed raised its benchmark interest rate for the first time since 2018 in the first of a series of expected increases. The U.S. economy could withstand higher rates, Powell said, due to continued strength in consumer spending and job growth despite annual inflation at its highest level in four decades.

But history shows that it’s rare for the Fed to raise interest rates to contain inflation without triggering a recession – what economists call executing a “soft landing.” Of the Fed’s nine attempts since the 1960s, a recession has occurred eight times, according to a report last month by investment bank Piper Sandler.

“The Fed doesn’t have a reputation for bringing inflation down without causing a recession,” said Bob Schwartz, senior economist at Oxford Economics, a global forecasting and analysis firm.

Still, Schwartz said the most likely scenario is a marked slowdown in economic growth. Oxford predicts that the growth rate of the US economy will decline from 5.7% last year to 3.1% this year and 2% in 2024. above recession territory.

It roughly corresponds to a report released Tuesday by the International Monetary Fund. It forecast the U.S. economy to expand 3.7% this year and 2.3% in 2023, down from January forecasts of 4% and 2.6%, respectively. The IMF has lowered its growth projections for the United States and other countries due to the war in Ukraine, which is also fueling higher prices.

“The global economic outlook has been severely damaged, largely due to Russia’s invasion of Ukraine,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. blog post Tuesday.

Biden administration officials have said they remain vigilant about economic threats and have taken steps to dampen inflation, such as releasing oil from the Strategic Petroleum Reserve.

“We are always trying to look over the horizon and understand the economic risks to the economy and for sure we are operating right now and we are in a period of high risk,” said Brian Deese, director of the White National House. Economic Council, told reporters in Washington this month. “The war in Ukraine. . . is a deep global supply shock, the implications of which we are working through and experiencing in real time.

In normal times, the risk of a recession in any given year is 12 to 15 percent due to the potential for unforeseen shocks to the economy and government policy missteps, Dynan said. And even if the United States fell into a recession within the next year or two, she predicted, it would more likely be a short, mild recession, like those of the early 1990s and 2000s, than a severe slowdown like Great Recession which hit in 2007 and revealed major structural problems in the economy.

“The economy was certainly very strong at the start of the pandemic, and even though we saw massive job losses during the pandemic, the fundamentals of the economy are still quite strong,” Dynan said. There are no major signs of weakness in US household and business finances, in part due to the government’s aggressive response to the pandemic.

But sometimes recessions can be caused simply by bad circumstances, said Stephanie Aaronson, director of the economic studies program at the Brookings Institution think tank. She referred to the 1990-91 recession, which was triggered by an oil price shock after Iraq invaded Kuwait and precipitated the Persian Gulf War.

The war in Ukraine is similar and “from a monetary policy perspective, it hasn’t made their job any easier,” Aaronson said of Fed officials. It estimated the risk of recession at 50% from the end of this year until 2023.

To avoid a recession, Aarronson said, the U.S. economy will need luck: easing energy prices and constraints on global supply chains. Treasury Secretary Janet Yellen, herself a former Fed chair, admitted during a Event in Washington last week that the central bank has a “tricky” effort that “will require skill and also luck.”

But another former Fed official doesn’t think even luck can save the US economy from a recession because the central bank waited too long to start raising interest rates to fight inflation. William Dudley, who served as president of the Federal Reserve Bank of New York from 2009 to 2018, said the only question is when, not if, a recession will occur, depending on how aggressively the Fed increases interest rates.

“A hard landing is inevitable,” he told Bloomberg TV this month. “Whether that happens in 23 or 24 is up to the Fed.”

But predicting recessions is hard, and Jamie Dimon, chief executive of JP Morgan Chase, the nation’s largest bank, wouldn’t be going there this month. Asked on the company’s quarterly earnings call if there will be a recession this year, he pointed to “storm clouds on the horizon,” including higher interest rates. high and the war in Ukraine.

“Hopefully all of these things will fade away and go away, we’ve got a soft landing and the war is over,” Dimon said. “I just wouldn’t bet on any of that.”


Jim Puzzanghera can be contacted at jim.puzzanghera@globe.com. Follow him on Twitter: @JimPuzzanghera.