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US fears recession soon

International 07 Apr, 2022 Follow News

US fears recession soon

The United States economy is predicted to descend into a recession next year when the Federal Reserve raises interest rates to combat high and widening inflation, according to two economists at Deutsche Bank. But they did state that it probably won’t last too long.

David Folkerts-Landau and Peter Hooper stated in a report on Tuesday that they see the Fed raising interest rates at each of its next three meetings on its way to a peak above 3.5 percent by the middle of next year.

Deutsche Bank is one of the first major banks to forecast a US recession. But Goldman Sachs Group Inc. economists led by Jan Hatzius said in a report on Monday that an economic downturn is “far from inevitable,” in part because consumers and companies are “flush” with cash. Nevertheless, there are millions of low-income earners who suffered financially in the two years that the covid pandemic was at its worst. They are likeliest to be affected by another downturn in the economy.

“Our call for a recession in the US next year is currently way out of consensus,” Folkerts-Landau and Hooper acknowledged in their report, adding: “We expect it will not be so for long.”

On top of the Fed rate increases, Deutsche forecasts the US central bank will reduce its $8.9 trillion balance sheet by almost $2 trillion by the end of next year.

“The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024,” Folkerts-Landau and Hooper wrote in a report entitled ‘Over the Brink’. Under the forecast, US unemployment rises sharply to 4.9 percent in 2024. Joblessness in March was 3.6 percent.

The closely monitored recession signal made investors fret that the Federal Reserve’s efforts to tame inflation will bring about a sharp slowdown in US economic activity. To the average American, gas prices are the best barometer. The US$5.83 Californians are paying on average for a gallon of gas stings. But it is double that in many places worldwide. For example, filling up a compact SUV in Hong Kong costs around $120. Prices have been so high in the Asian financial centre that commuters no longer drive to work, opting instead to ride the hard aluminium seats on the city’s subway trains. Even before Russia’s invasion of Ukraine hit energy markets, Hong Kong was one of the most expensive places in the world to fill a tank.

The same goes for Singapore, another financial hub in Asia, and a host of Western European nations such as the Netherlands, Norway, Finland, Denmark, Sweden, France and Britain — all countries where gas costs more than $8 a gallon. In London the average price is $12 with prices in the $15 range in affluent areas!

The United States, by comparison, is still the most affordable advanced nation to purchase gas in, on par with the likes of developing countries such as Liberia, Rwanda, El Salvador and Zambia, according to research site GlobalPetrolPrices.com.

“The US actually has some of the cheapest gasoline in the world,” said Rob Smith, director of global fuel retail at S&P Global. “Even California was, until the recent price spike, below or even with most other major markets.”

The recession fears are driven by rising inflation, with consumer prices increasing at the fastest pace in 40 years. Hopes that inflation would rapidly cool off are dashed, in part because of the war in Ukraine.

Deutsche predicts the fall in growth will only continue in late 2023 and early 2024 and take a toll on US jobs. Unemployment rate is about six million Americans out of jobs, a steady recovery from the pandemic that left 20 million unemployed.

Should Deutsche's prediction come true and unemployment increases by 1.5 percent, about eight million people will be out of work.

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