LONDON (Financial Times) - The risks of the U.S. and Europe sliding into recession have picked up sharply, economists have warned ahead of the G7 summit that begins this weekend in Bavaria.
Economists on both sides of the Atlantic said that they had become increasingly pessimistic following the Federal Reserve’s decision to go big on rate rises to counter soaring inflation, and on mounting concerns over Europe’s gas supply in the run-up to winter.
Holger Schmieding, chief economist at Berenberg Bank, said the balance had now “tipped” in favor of an economic contraction next year in the U.S. and Europe. “What used to be a rising risk has now turned into the base case.”
Goldman Sachs doubled the risk of the U.S. entering a recession this year from 15 per cent to 30 per cent, with a 48 per cent probability of a recession over a two-year horizon in the wake of the Fed’s first 75 basis point rise since 1994. “U.S. recession risks are uncomfortably high and rising. I would put them at 40 per cent in the next 12 months, and more or less even odds over the next 24,” said Mark Zandi, chief economist of Moody’s Analytics. He added that Europe was even more vulnerable. “To avoid recession, the global economy needs a bit of luck and for the economic fallout from the coronavirus pandemic and Russian aggression to wind down quickly, along with some deft policymaking by the Fed and other central banks,” Zandi said.
G7 leaders will discuss the state of the global economy at their working lunch on Sunday, with inflation set to dominate proceedings.
Gas supply to Europe has become more uncertain following Russia’s decision to cut flows to many countries. Supply chain disruptions resulting from China’s zero-COVID policy continue to weigh on growth prospects. The Fed’s rise prompted private sector economists to downgrade their U.S. forecasts for 2023 by the biggest margin so far this year, with even larger downgrades than those made at the start of the Ukraine war, according to Consensus Economics, which tracks growth and inflation forecasts.
Economists also cut sharply their 2023 outlook for the eurozone, the UK and eight in 10 other countries and regions tracked by Consensus Economics. Neil Shearing, chief economist at Capital Economics, said the recession risks are highest in Europe, where the inflation-induced cost of living crisis is coupled with possible gas shortages. Like in the U.S., the UK and the eurozone are also dealing with inflation at multi-decade highs.