US recession odds rise as global trade conflict deepens
- The US' new tariff regime is forecast to weigh heavily on the growth outlook.
- Financial institutions see a stronger probability of a recession in the US.
- The Fed is expected to address the worsening outlook by cutting rates at the next meeting.
Expectations for the United States (US) economy to tip into recession this year gain traction following the introduction of aggressive tariffs by US President Donald Trump.
Federal Reserve Chairman Jerome Powell said on Friday that they don't have a probability forecast of a recession. "We don't make a probability forecast of how likely it is for there to be a recession, but many outside forecasters do and many of them have raised the likelihood, albeit from very low levels,” Powell explained.
Is a US recession imminent?
Goldman Sachs, who was predicting a 20% probability of a recession in the US before Trump's tariff announcements, raised this odd to 35% initially, before raising it again to 45% on Monday.
Similarly, JPMorgan Chase lifted its odds for a US and a global recession to 60%. "Disruptive US policies have been recognized as the biggest risk to the global outlook all year," the brokerage wrote in a note late last week. Meanwhile, CEO Jamie Dimon said on Monday that the US economy is facing considerable turbulence, with potential positive effects from tax reforms and harm from tariffs and trade wars.
Morgan Stanley noted that although they are not forecasting a recession, they see the gap between a sluggish growth and a downturn has narrowed. Additionally, the financial services provider revised the quarterly Gross Domestic Product (GDP) growth forecast down to 0.8% for the fourth quarter from 1.5% previously.
Finally, S&P Global announced that they raised their subjective probability of a US recession to 30%-35 from 25% in March.
Markets expect the Fed to take a dovish turn
Alongside heightened expectations for a downturn in the US economy, the probability of a 25 basis points (bps) Fed rate cut in May also increased. According to the CME FedWatch Tool, markets are currently pricing in a nearly 72% probability of a Fed rate cut at the next meeting, up from about 20% on April 1.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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