  BLOG  R ECESSIO N 2023:

THE LOOM ING THREAT TO G LO BAL

E CON OM IE S

 Recession 2023: The Looming Threat to

Global Economies
 

 Mixed Economic Signals

April 18, 2023

The US job market appears to be stable, but there are concerns that the
economy may head towards a recession in 2023 due to other economic
indicators. The Conference Board’s Leading Economic Index has declined
by nearly 4% over the past six months, a signi cant drop that typically
indicates a recession. In addition, the treasury yield curve has been
inverted since July 2022, suggesting a high probability of a recession by
the end of the year.

Despite some positive economic data, the risk of a recession remains a

concern for investors. While some indicators suggest the economy is
resilient, the risk of a recession is still present.

Federal Reserve’s Efforts to Control In ation

The Federal Reserve’s efforts to combat rampant in ation that affected

the economy in the past year have led to interest rates and in ation
concerns. The central bank raised interest rates to control in ation,
which has led to a broader economic slowdown affecting the housing
sector and manufacturing activity.

A new report suggests that the interest rate increases by central banks
may not be enough to bring global in ation back down to pre-pandemic
levels. Investors expect central banks to increase international monetary
policy rates to almost 4% through 2023, which could leave the global
core in ation rate at about 5% that year.

Policymakers’ Focus on Production

Policymakers must shift their focus from reducing consumption to

boosting production to achieve low in ation rates, currency stability, and
faster growth. This requires generating additional investment, improving
productivity, and capital allocation, which is critical for growth and
poverty reduction. Failure to do so could lead to long-lasting
consequences that devastate emerging markets and developing
economies.

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Goldman Sachs’ Optimistic View

Goldman Sachs Research estimates a lower risk of a US recession in

2023, with a probability of 35%, in contrast to the consensus estimate of
65%. David Mericle, the chief US economist, and Alec Phillips, the chief
US political economist, attribute their more optimistic view to their belief
that a continued period of below-potential growth can gradually
rebalance supply and demand in the labour market and dampen wage
and price pressures with a limited increase in the unemployment rate.

Mericle and Phillips argue that the potential for a recession in 2023 is
lower than the consensus estimate of 65%. They suggest that the
continued period of below-potential growth can gradually rebalance
supply and demand in the labour market and dampen wage and price
pressures with a limited increase in the unemployment rate. Moreover,
last year’s aggressive Federal Reserve policy’s impact on GDP growth will
likely diminish in 2023.

A Contrarian View

Phillips and Mericle also suggest that the jobs-workers gap needs to
shrink further to be compatible with sustainable wage growth. They
estimate that the jobs-workers gap has fallen from a peak of 5.9 million
to 4 million, with all the decline in labour demand so far coming from a
decline in job openings rather than in employment. Although this is
encouraging, the gap must shrink to 2 million to be compatible with a
more sustainable wage rate.

Conclusion

The US job market may be steady, but the risk of a recession in 2023
cannot be ruled out due to other economic indicators. While the Federal
Reserve faces challenges in managing in ation and interest rates,
policymakers must shift their focus from reducing consumption to
boosting production to achieve low in ation rates, currency stability, and
faster growth. Investors should monitor various data points to make
informed decisions. At the same time, the contrarian view offered by
Goldman Sachs Research suggests that a recession in 2023 may not be as
likely as previously thought.

 FAQ

 What is the likelihood of a recession in the US in 2023?

Experts have differing opinions regarding the likelihood of a recession in

the US in 2023. While some economic indicators suggest a recession,
Goldman Sachs Research estimates a lower risk of a US recession in
2023, with a probability of 35%, in contrast to the consensus estimate of
65%.

 What are the economic indicators that suggest a recession?

The Conference Board’s Leading Economic Index has declined by nearly

4% over the past six months. The treasury yield curve has been inverted
since July 2022, indicating a high probability of a recession by the end of
the year.

What challenges does the Federal Reserve face in managing

in ation and interest rates

The Federal Reserve’s efforts to combat in ation have led to interest

rates and in ation concerns. The central bank raised interest rates to
control in ation, which has led to a broader economic slowdown
affecting the housing sector and manufacturing activity. Moreover, a new
report suggests that the interest rate increases by central banks may not
be enough to bring global in ation back down to pre-pandemic levels.

 How should policymakers achieve low in ation rates, currency

stability, and faster growth?

Policymakers must shift their focus from reducing consumption to

boosting production. This requires generating additional investment,
improving productivity, and capital allocation, which is critical for growth
and poverty reduction.

What is the contrarian view offered by Goldman Sachs Research?

Goldman Sachs Research estimates a lower risk of a US recession in

2023, with a probability of 35%, in contrast to the consensus estimate of
65%. David Mericle and Alec Phillips, the chief US economists at
Goldman Sachs, suggest that the potential for a recession in 2023 is
lower than the consensus estimate of 65%. They believe that a continued
period of below-potential growth can gradually rebalance supply and
demand in the labour market and dampen wage and price pressures with
a limited increase in the unemployment rate.

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