Recession YES or recession NO?
🎧💡 #21 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
What you’ll find in this episode:
Is this hiking cycle will led us to a recession?
Which Arguments are in Favor & Against of a US Recession
Which Prospective Total Returns can we expect in 2023?
Recession or not? This is the question that most of us are trying to interpret as clear as we can during these days.
I’ve found an interesting paper by Goldman Sachs about it, and in this article you can find the most interesting parts that will help us to answering us at the best.
Not every Federal Reserve hiking cycle and subsequent tightening of financial conditions has resulted in a recession.
Of 15 hiking cycles in the post-WWII period, only nine, or 60% of the cycles, did so.
The cycles that led to recessions can be differentiated from those that did not by some combination of the magnitude of tightening and the pace of tightening.
Introduction
Let’s begin saying that Goldman Sachs has assigned a probability range of 45–55% to the risk of a US recession in 2023.
A midpoint of 50% and a 10-percentage-point range reflect the uncertainty of our forecast.
A recession is not our base case, and our investment recommendations are based on this 45–55% probability.
Since we at ISG started publishing recession probabilities, we have been quite unequivocal about our forecasts.
As show above, Goldman Sachs probabilities have ranged from a low of 10% to a high of 30%.
The probability for 2022 was 10%. Since the global financial crisis (GFC), we have never forecast a recession, and except for the brief pandemic-induced recession, the US economy has not experienced one since then.
Key Arguments in Favor of a US Recession
The most compelling and most frequently cited rationale for predicting a recession in 2023 is the speed of tightening conducted by the Federal Reserve and the subsequent tightening of financial conditions.
As the Federal Reserve tightens monetary policy by raising the federal funds rate and reducing the size of its balance sheet, financial conditions are tightened as:
Interest rates rise across the Treasury yield curve.
The incremental cost of borrowing across businesses and households increases.
Equity markets decline, creating a negative wealth effect in which consumers reduce consumption as they become less wealthy.
The dollar appreciates relative to other currencies, lowering exports as the cost of US goods rises for non-US-dollar importers.
Key Arguments Against a US Recession
We now consider four factors suggesting the US economy may be able to avoid a recession:
a balanced economy,
a shorter lag of policy tightening,
declining inflation and
the possibility of fewer Federal Reserve hikes than are currently expected.
Prospective Total Returns
As shown above, Goldman Sachs expect US and Eurozone equities to be the best-performing asset classes in 2023, with total returns in local currency of about 13% in our base case scenario.
They expect returns of 12% for the MSCI All Country World Index.
If you had like this piece and you want to read the whole advanced article I invite you to go on my website www.scriptamanent.blog (you can find the link in the description), which you can find many more useful insights.
Best regards,
🔔 If you like my work, one simple thing that would make me very happy is if you’d bring only two friends/colleagues within our community - they might appreciate it and after all…it’s free!
Feel free to share my contents with anyone you think is might be interested with the link below!
🔍 We are a community of Macro & Business enthusiasts and lovers of Financial Markets.
💡 If you want even more free, valuable financial content you can also follow me on Twitter and visit my Website for more in deep analysis.
Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.