The world is breathing a sigh of relief as the chances for a US economic recession, which usually prompts a global one with the U.S. dollar being the top trade and reserve currency, are easing.
This comes as the FED ponders keeping interest rates at their current levels or applying a cautionary 25 basis points increase. The most recent Consumer Prices Index (CPI) report revealed that inflation is increasing at its slowest pace since March 2021, at 3% inflation just below the FED’s targeted 2%, while core inflation, which excludes food and energy categories, is sitting at 4.8%.
Goldman Sachs believes there’s only a 20 percent chance the U.S. economy will be in a recession in the next 12 months. That’s 5% less than what it had previously anticipated. The Wall Street Journal opines there is a 54% chance of this happening.
Read: Federal Reserve expects recession in US economy by end of 2023
“The recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession,” Goldman Sachs chief economist Jan Hatzius reported recently.
A resilient US economy shows that June jobs left only a 3.6% unemployment rate while average hourly wages increased 4.4% compared to last year, hyping consumer sentiment.
The earnings season could also ignite the S&P 500 beyond the already 26% rally from October 2022.
UBS: Reasons for lower recession fears
Economists at the Swiss banking giant UBS said that even after the FED increased interest rates by 500 basis points over the past 5 quarters, inflation-adjusted borrowing costs in the US is still very low. They said that the central bank’s balance sheet remained 80% larger than pre-pandemic levels suggesting that monetary conditions are flexible.
UBS also said that what is helping cushion the economy is the government’s spending which is on the rise again, and availing liquidity in the financial system.
Meanwhile, fueling consumption has been due to the savings accrued during the pandemic, again buffering the effects of inflation.
Inflation has deflated high debt levels, lowering the risks on financial institutions, according to UBS, which added that salaries are near their pre-pandemic levels.
US manufacturing and housing starts, which had slumped in 2022, may currently be recovering, UBS said.
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