We expect several major economies, including the US, euro area, UK, Japan, South Korea, Australia and Canada, to tip into a recession over the next 12 months, owing to tightening monetary and fiscal policies, rising cost of living pressures from high commodity prices and tighter financial conditions.
The expectations of a worsening global growth outlook follow our call last month in which we saw an increasing likelihood of the US entering a mild recession in Q4 this year, given its rapidly slowing growth momentum and the Federal Reserve’s commitment to restoring price stability.
Increasing signs now point to the world economy entering a synchronized growth slowdown, though the extent of it will vary from country to country. That countries can no longer rely on a rebound in exports for growth has also tipped the scales towards this forecast.
Technically, two consecutive quarters of real GDP contracting by 0.1 percent quarter-on-quarter meets the definition of a recession, but recessions can vary greatly in length and severity.
In the US, we expect the Fed to continue its rate hikes into a recession, with a terminal fed funds rate of 3.50-3.75% in February 2023. The front-loaded hikes aimed at combating inflation will likely result in a shallow but long recession that stretches over five quarters in the US. We forecast real GDP growth of -0.3% q-o-q in Q4 this year and -1.0% y-o-y in 2023. Strong household balance sheets should limit the depth of the recession.
In Europe, despite our new baseline of a recession that is similar in magnitude to the US, risks appear firmly skewed towards a much deeper recession, in a scenario where Russia completely cuts off gas to the continent. In Japan, the forecast is for the mildest of technical recessions, as the economy faces some offsetting tailwinds from the delayed reopening and as it is one of the few economies with continued policy support. In addition to high inflation, South Korea, Australia and Canada have had debt-fueled housing booms and are at risk of deeper-than-forecast recessions, if interest rate hikes trigger housing busts and deleveraging.
The odd one out is China, which is recovering from recession as the economy unlocks amid accommodative policies, though it is at risk of renewed lockdowns and another recession if Beijing sticks to its zero-Covid strategy.
Despite our forecast for recessions and signs that supply chain disruptions are easing, global inflationary pressures have broadened and intensified beyond commodity prices to services items, rentals and wages, and rising consumer inflation expectations, pointing to more persistent inflation. At the same time, longer-run global disinflationary forces like globalization and demographics are dissipating and giving way to splintering global supply chains from heightened geopolitical risks, and ‘greenflation’ from climate change transition and more extreme weather events.
With their inflation-fighting credibility on the line, central banks across the world look determined to push inflation back toward target levels before moving to cut rates in 2023. They recognize that the long-term benefits of bringing down inflation and not allowing it to become entrenched with wage-price spirals far outweigh any short-term costs of hurting growth.
Head of Global Macro Research
Economist, Asia ex-Japan
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