Economists are increasingly confident that the economy will grind to a standstill and begin declining shortly. The Financial Times and the Initiative on Global Markets, a University of Chicago economic policy and market research center, surveyed 49 U.S. macroeconomics specialists at the beginning of June 2022. And the recession will likely happen next year.
National Bureau of Economic Research (NBER) defines a recession as a severe fall in economic activity spanning two fiscal quarters. First-quarter GDP decreased by 1.5%. In late September, the B.E.A. will reveal second-quarter numbers. Nearly 70% of economists questioned anticipate the NBER will make this decision in 2023, with 38% predicting a recession in the first two quarters and 30% in the second.
Only one of the economists forecasts a recession this year, while 30% say it won’t happen until 2024. Since the Russian invasion of Ukraine at the end of February, food, and gas costs have risen the most, causing inflation. More than half of the economists polled expected that the same forces—geopolitical worries arising from the Ukraine war and increased energy costs—would endure for the rest of 2022 and into 2023, putting pressure on inflation in the United States to rise further.
The study did not differentiate between a severe or moderate recession in 2023, but experts identified numerous variables that might minimize tighter monetary policy’s negative economic repercussions. A quarter of experts believe that increased consumer spending through inflation will reduce losses and improve the possibilities of a mild economic decline.
The U.S. housing market, which has been red-hot for months and will likely remain so next year, might prevent a devastating recession. Over half of the experts polled believe that the active housing market would keep the US economy out of a terrible recession, joining the likes of mortgage corporation Fannie Mae, which has previously forecast that a hot housing market will soften the impact during a recession. The recent economic and housing forecast shows that the recession may begin in Q1 2023.
The Conference Board predicts modest economic growth this year and a brief recession in late 2022 and early 2023. This outlook is linked to inflation and the rising hawkishness of the Federal Reserve. They predict Real GDP growth of 1.7% in 2022 and 0.5% in 2023. They don’t believe the US economy is in a recession but they’re lowering their Q2 2022 growth forecast from 1.9% to 0.8%.
This reduction follows Q1 2022 GDP growth of -1.6% and weaker May and June economic data. Given recent changes in private inventories and trade flows, Q2 2022 might see negative growth for a second straight quarter. Given the strength of the US job market and domestic demand, they don’t believe this would be a recession (especially for services). They don’t see any signs of a recession.
Economic growth will slow in 2022, and a small recession is likely. High inflation and monetary tightness cause it. Eastern European conflict and other geopolitical events have boosted energy and food costs. China’s COVID-19 lockdowns have affected supply lines. They estimate year-over-year inflation to peak in Q2 2022 after recent improvements on these issues. Inflation will be above 2% until 2023.
High inflation numbers make US monetary policy aggressive. The Fed has signaled that it intends to raise interest rates markedly over the coming months and that the Fed Funds rate will likely end 2022 in “restrictive” territory (above 3 percent) before continuing to rise potentially to 3.75-4.00 percent in 2023. Higher interest rates will slow spending, corporate investment, and the labor market.
OECD Economic Forecast 2022 [September]
The OECD Economic Outlook is the OECD’s twice-yearly analysis of the major global economic trends and prospects for the next two years. Prepared by the OECD Economics Department, the Outlook puts forward a consistent set of projections for output, employment, government spending, prices, and current balances based on a review of each member country and of the induced effect of each of them on international developments. The Interim Report September is an update on the assessment in the June 2022 issue of the OECD Economic Outlook.
The following is an overview of the global economic outlook for 2022 and 2023 against the backdrop of the Ukraine conflict.
The global economy has been hit by Russia’s invasion of Ukraine.
Global economic growth stalled in the second quarter of 2022, and indicators in many economies now point to an extended period of subdued growth.
The war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world.
Global growth is projected to slow from 3% in 2022 to 2¼ percent in 2023, well below the pace foreseen prior to the war.
In 2023, real global incomes could be around USD 2.8 trillion lower than expected a year ago (a shortfall of just over 2% of GDP in PPP terms).
Annual GDP growth is projected to slow sharply to ½ percent in the United States in 2023, and ¼ percent in the euro area, with risks of output declines in several European economies during the winter months.
Growth in China is projected to drop to 3.2% this year, amidst COVID-19 shutdowns and property market weakness, but policy support could help growth recover in 2023.
Inflation has become broad-based in many economies.
Tighter monetary policy and easing supply bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher labor costs are likely to slow the pace of decline.
Headline inflation is projected to ease from 8.2% in 2022 to 6½ percent in 2023 in the G20 economies, and decline from 6.2% in the G20 advanced economies this year to 4% in 2023.
Significant uncertainty surrounds the projections.
More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1¼ percentage points in 2023, with global growth lowered by ½ percentage points, and raise European inflation by over 1½ percentage points.
Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.
Fiscal support is needed to help cushion the impact of high energy costs on households and companies.
However, this should be temporary, concentrated on the most vulnerable, preserve incentives to reduce energy consumption, and be withdrawn as energy price pressures wane.
Short-term fiscal actions to cushion living standards should take into account the need to avoid further persistent stimulus at a time of high inflation and ensure fiscal sustainability.
Governments need to ensure that the goals of energy security and climate change mitigation are aligned.
Efforts to ensure near-term energy security and affordability through fiscal support, supply diversification, and lower energy consumption should be accompanied by stronger policy measures to enhance investment in clean technologies and energy efficiency.
The fallout from the war remains a threat to global food security, particularly if combined with further extreme weather events resulting from climate change.
International cooperation is needed to keep agricultural markets open, address emergency needs and strengthen supply.
Economic Forecast For 2022 & 2023: Recession May Begin Next Year
According to Fannie Mae’s Economic and Strategic Research Group, real GDP will rise 0.1 percent in 2022 and fall 0.4 percent in 2023. In July, projections for full-year 2022 and 2023 real GDP growth were reduced owing to weaker consumer spending and a negative revision to corporate inventory investment statistics, amid record inflation and increasing interest rates. The ESR Group predicts that real GDP will grow by 0.1 percent in 2022 and decline by 0.4 percent in 2023, compared to the previously expected 1.2 percent increase and 0.1 percent decrease.
Important Points
The ESR Group expects inflation, as measured by the Consumer Price Index, to have moderated to 5.7% on a year-over-year basis, down from the June reading of 9.1%.
Due to inflation, Fannie Mae is seeing homes listed for sale increasingly reducing prices, and both construction and home sales are receding.
Due to the forceful monetary policy response required of the Federal Reserve to bring inflation down from its present decade-high levels, the ESR Group now anticipates a recession to begin in the first quarter of 2023, sooner than originally anticipated. The ESR Group predicts inflation, as measured by the Consumer Price Index, to have eased to 5.7 percent year on year by the fourth quarter of 2022, down from 9.1 percent in June, and then to 1.6 percent by the end of 2023, somewhat below the Fed’s 2 percent objective.
Negative GDP growth in Q2 would mean two consecutive quarters of decline, which defines a recession. While a convenient rule of thumb, it is not the technical definition per the National Bureau of Economic Research (NBER), the official arbiter of business cycle timing. They do not believe a broad economic recession began in the first half of this year based on a holistic examination of economic data. The Omicron wave of COVID-19 and supply chain interruptions caused Q1 data anomalies not representative of the general economic trend.
Real Gross Domestic Income (GDI) grew 1.8% annualized in Q1 vs GDP’s 1.6% drop. Business fixed investment, which decreases during a recession, surged by 10% annualized in Q1, signaling ongoing expansion. Historically, when a recession begins, the unemployment rate rises. In Q1, payroll employment growth was substantial, gaining over 500,000 jobs each month. In Q2, the unemployment rate stayed at a cycle low of 3.6%, and most non-GDP economic activity indicators are not yet pointing to a decline. Q3 GDP growth should be moderate.
Housing Sales Forecast Reduced Due to Weaker Economic Outlook
The ESR Group also revised its forecast for total home-sales growth in 2022 to a decline of 15.6%, compared to its June prediction of 13.5%. However, the group revised upward its home-price appreciation forecast to 16% year-over-year growth in 2022 from the previously projected 10.8%. They continue to expect a significant slowing in home price increase in the future due to the lag effects of rising mortgage rates and a deteriorating economy impacting buyer demand.
Both existing and new home sales came in for the month of May in line with ESR Group’s expectations. The former declined 3.4% to 5.41 million units annually and 8.6% year-over-year. New house sales rose 10.7% in May after falling 12.0% in April. New house sales down 3.1% year-over-year. Despite current sales being near projections, they’ve lowered their 2022 and 2023 sales outlook.
This is motivated by a revised macroeconomic prognosis and an expected early recession. The group now expects 4.57 million yearly existing house sales in 2022, down from 4.83 million. Their prediction for existing sales in 2023 is 4.55 million units, down from 4.67 million. New home sales are expected to fall below 600,000 by the end of the year on a quarterly annualized basis and then remain at similar levels in 2023.
Source: Fannie Mae
House Price Growth to Decelerate
The group expects house price growth to slow, although it was strong in the second quarter. Fannie Mae’s Home Price Index shows house prices grew 19.4% year-over-year in Q2, down from Q1’s 20.5%. They’ve increased their home price growth predictions for 2022 due to this strength, although they expect quarterly price growth to slow from 6% in Q2 to 1.5% by Q4 2022.
Home price changes tend to lag changes in home sales as prices tend to be “sticky”. Sellers are reluctant to lower their asking price, while buyers base their expectations on previous transactions. Price rise is moderating, though. Redfin reports that 7.1% of listings see price drops per week, up from 2% in March. Recently, asking prices have dropped. Realtor.com reports that active listings are up 28% from a year ago as of July 9. While this remains a tight market, the direction is clearly loosening.
Source: Fannie Mae
Mortgage Originations Outlook
Several variables changed their mortgage origination forecast. A modestly higher mortgage rate forecast along with a weaker GDP outlook led to a lower volume of expected loans originated, both for purchase money and refinance mortgages. However, the upward revision to their house price forecast increases the expected dollar size per loan originated.
Total mortgage originations are predicted to be $2.53 trillion in 2022, a $71 billion decrease from last month’s prediction. Purchase volumes were reduced by $30 billion to $1.78 trillion and by $41 billion to $756 billion. In 2023, overall originations are expected to decline to $2.22 trillion, a $19 billion increase from last month’s prediction due to higher buy originations. This is because higher home prices outweigh the down revision to home sales.
Economists’ Outlook of a Recession
The NBER defines a recession as a widespread, multi-month drop in economic activity. The committee believes that severe circumstances exhibited by one criterion may somewhat counterbalance weaker indicators from another. For example, in the case of the February 2020 peak in economic activity, they concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief.
In April 2020, two months after the top, the committee decided on the trough. A recession-free time is an expansion. Most recessions are temporary; growth is usual. However, it may take a while for the economy to reach its earlier high. The NBER timeline does not specify when the economy began a recession or growth.
The start month of a recession, according to the NBER’s norm, is the month after the peak, and the last month is the month of the trough. Because the most recent dip occurred in April 2020, the recession ended in April 2020, and the ensuing expansion began in May 2020. Imagine a March high and a September bottom. The recession lasts six months, from April to September. If the peak occurred in June of the next year, the expansion would run for nine months, from October to June.
Sources
https://www.conference-board.org/research/us-forecast
https://www.igmchicago.org/wp-content/uploads/2022/06/RESULTS-2022-06-06-Survey-05.pdf
https://fortune.com/2022/06/13/recession-economists-survey-2023-inflation-interest-rates/
https://www.fanniemae.com/research-and-insights/forecast/economic-growth-stagnating-face-high-inflation
https://www.nber.org/business-cycle-dating-procedure-frequently-asked-questions
https://www.bea.gov/news/2022/gross-domestic-product-second-estimate-and-corporate-profits-preliminary-first-quarter
https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2022/issue-1_ae8c39ec-en
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