In this podcast, co-hosts Luke Bartholomew and Paul Diggle speak to abrdn’s Deputy Chief Economist about the US-led global recession we are forecasting.
The key takeaways were:
- We expect the US economy to fall into recession in the second half of 2023 as a result of the Fed’s monetary policy tightening.
- History suggests that when inflation gets this high and unemployment this low, hiking cycles overwhelming end in recessions. That is because the way to rebalance the economy and tame inflation expectations is to deliver a slowdown in activity commensurate with a recession.
- The recession is not a ‘policy error’ in the conventional sense, but rather a necessary corrective. The policy error occurred in letting economic imbalances grow this big in the first place.
- Recession forecasts are notoriously difficult to make with many false negatives and false positives. This is the result of many factors, including the random nature of the shocks than often cause recessions, and the feedback that exists between forecasts and policy makers, with policy makers often actively trying to stop any forecasted recessions through stimulative policy.
- Because we consider this to be a necessary recession, policy makers cannot act to stop the downturn we expect. Indeed the Fed is actively trying to deliver a slowdown, not avert one.
- Moreover, ongoing evidence of demand strength would not ease our recession concerns, but exacerbate them, as this would imply inflationary imbalances were getting more entrenched. It is only positive news about the supply side that would make us less concerned about a recession.
