The probability of a global economic recession is now near 50% as the Federal Reserve and other central banks scramble to address inflation by raising interest rates, according to the latest analysis by Citigroup.
Citigroup analysts cited the impact of sharp interest rate hikes and signs of weakening consumer demand for goods while delivering the forecast update.
“The experience of history indicates that disinflation often carries meaningful costs for growth and we see the aggregate probability of recession as now approaching 50%,” the Citigroup economists wrote in a note, according to Bloomberg.
“Central banks may yet engineer the soft — or ‘softish’ — landings embodies in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient,” the note added.
Stocks have remained volatile in recent trading as investors express skepticism about the Fed’s ability to secure a “soft landing” for the economy while hiking rates to combat decades-high inflation. Last week, the Fed raised its benchmark rate by three-quarters of a percentage point for the first time since 1994.
Citigroup said a recession, if it does happen, will be a “garden variety” slowdown. The analysts predicted an increase in unemployment rates, which are hovering below 4% in the US.
“We see this as a reasonable expectation, but the wildcard — as we have emphasized — is how stubborn inflationary dynamics ultimately prove to be,” the note added.
Fed Chair Jerome Powell acknowledged that a recession was “certainly a possibility” during testimony on Capitol Hill on Wednesday.
“It’s not our intended outcome at all, but it’s certainly a possibility, and frankly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market,” Powell said.
Citigroup is the latest of a growing list of institutions and economists who have raised alarms about a looming recession.
Earlier this week, analysts at Goldman Sachs warned that their forecast showed the risk of recession within the next 12 months has doubled to 30%, up from 15% under their previous projection.
Over the next two years, Goldman Sachs economists see a 48% recession risk.
Goldman analysts said they are “increasingly concerned that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further, even if activity slows sharply.”