Deutsche Bank Chief U.S. economist Matt Luzzetti was the first economist to predict a recession in 2023, however now he is moving up his prediction for the coming economic contraction.
Since then he wrote, “More than two months ago we forecasted that the U.S. economy would tip into a recession by end-2023. Since that time, the Fed has undertaken a more aggressive hiking path, financial conditions have tightened sharply and economic data are beginning to show clear signs of slowing. In response to these developments, we now expect an earlier and somewhat more severe recession.”
He is predicting that in the first half of 2023, US GDP growth will be coming in at “sub-1%,” which will progress to a -3.1% contraction in the third quarter of 2023. That is one quarter earlier than when he made his first prediction. He also expects growth to contract by another -0.4% in the fourth quarter, and he predicts the CPI will rise to 9% in the third quarter of 2022.
He went on, “The upshot is that the economy is likely to contract next year by about 0.5%,. A more severe downturn leads to a higher unemployment rate, which peaks near 5.5%. The weaker labor market helps to guide inflation closer to target by 2024, though we still anticipate a nearly half percent overshoot at that point.”
Analysts are increasingly getting edgy over the prospect of a recession since the last FOMC meeting, where rates were raised 0.75%, and the Fed issued a host of dreary predictions of future economic performance.
The Fed reiterated Friday that it intends to hold a hard line against inflation in the months to come. That placed yet another weigh on the market, even as the S&P 500 and the Nasdaq already were sitting in bear territory.
Luzzetti noted, “A more severe tightening of financial conditions could easily pull forward recession risks to around the turn of the year, which could short-circuit the Fed’s tightening cycle. That said, higher inflation during that period would likely constrain the Fed’s ability to cut rates to counteract the downturn. On the other side, a more resilient economy in the near-term with more persistent inflation pressures would spell upside risk to our Fed view.”
