Remember that looming recession? Economists entered 2023 bracing for a US recession. Phew! No recession or another market crash so far. The US economy propelled by stronger than expected job growth and steady consumer spending despite high inflation, has remained rather resilient statistically.
In the most recent investor survey from Bank of America Merrill Lynch, 75% of those polled see a soft landing or no landing as the most plausible outcome for the US economy. This is a 10% increase on the previous month and reflects better data on growth and inflation.
However, there are contrarian voices suggesting that the consensus is too optimistic, and a harder landing is a more plausible scenario than equity markets believe. Expect the debate on recession to become more “urgent” in the coming months. Fidelity expects a cyclical recession next year in an article from FSA which landed in my inbox.
Here is a section:
In its global investment outlook for 2024, Fidelity International outlined why it is important to adopt a “scenario-based approach” which takes into account the complexities of the current global economic and markets cycle.
A “soft landing” (moderating growth and inflation in the US) be maintained for some time, but as 2024 progresses the probability of a cyclical recession rises sharply, the asset manager told a media briefing in Hong Kong last week.
“Markets continue to believe in a ‘soft landing’, where the rate hikes and the tightening of the past two years will do just enough to gradually return the economy and labour market to equilibrium,” said Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International.
Fidelity warned that its proprietary macro and bottom-up indicators show a mixed picture driven by the delayed effect of the extraordinary fiscal stimulus, run-down of excess savings and a refinancing picture that is still benign.
As the year progresses, Ahmed thinks the transmission channel will strengthen leading to a cyclical recession outcome, to which he gives a 60% probability. “Europe is already feeling the pain of the rate hikes (as growth has slowed sharply) but the macrocycle path in the US is likely to remain more complex into 2024 as well,” he said.
Ahmed is “confident” that the US and other developed world interest rates have most likely peaked, and against this backdrop, he expects growth will moderate with a high risk of a moderate growth contraction developing later in 2024, with both the domestic and geopolitical picture remaining in flux as major elections approach, including in the US.
“Fundamentally, we continue to believe there is simply a lag between policy tightening and the effects on the real economy. The transmission channel is delayed, not broken,” he said.