Goldman Says Ukraine-Russia War Could Trigger U.S. Economic Recession


Goldman Sachs economists have warned that the likelihood of the US economy plunging into a recession next year has increased dramatically following the Russian-Ukrainian war.

Economists, led by Jan Hatzius, cut their forecast for economic growth this year to 1.75% from 2.0% and noted that such a prospect means there is a “higher risk” of around 20 % to 35% that the United States will enter a recession over the next year.

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“While our baseline forecast assumes that the continued reopening of the service sector and spending from excess savings will keep real GDP growth positive over the coming quarters, the uncertainty surrounding the outlook is higher than normal,” they wrote in Thursday’s analyst note. “We consider the risks of a recession to be broadly consistent with the 20-35% probabilities currently implied by models based on the slope of the yield curve.”

Gas prices are reported at over $5 a gallon on Monday, February 28, 2022 in Los Angeles. (Associated Press/AP Newsroom)

The downgrade comes after the Labor Department said consumer prices rose 7.9% in February, the fastest pace since January 1982, when inflation hit 8.4%. Consumers pay more for daily necessities, including races, gasoline and cars.

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The stunning reading – which marked the ninth month in a row the gauge has been above 5% – has increased the pressure on the Federal Reserve chart a more aggressive course in the normalization of monetary policy.

The central bank announced on Wednesday that it would raise interest rates for the first time in three years as policymakers, raising the benchmark fund by 25 basis points and ending the ultra-loose monetary policy put in place. place two years ago to support the economy through the coronavirus pandemic.

Federal Reserve Chairman Jerome Powell speaks during a press conference in Washington, March 3, 2020. (Associated Press/AP Newsroom)

Rising interest rates tend to create higher rates on consumer and business loans, which slows down the economy by forcing them to cut spending.

The rate hike, which puts the benchmark federal funds rate in a range between 0.25% and 0.5%, is likely just the start of a series of hikes aimed at curbing runaway inflation.

New economic projections released after the meeting show policymakers expected six more increases of a similar size during 2022 after consumer prices hit their highest level in 40 years. This marks a dramatic change from just six months ago, when half of central bankers believed interest rate hikes were not warranted until at least 2023. Fed officials also expect inflation remains high, ending 2022 at 4.3%, well above the Fed’s annual target. by 2.3%.

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In his post-meeting press conference, however, Chairman Jerome Powell downplayed broader economic concerns related to the war and aggressive policy tightening.

“The likelihood of a recession next year isn’t particularly high,” Powell told reporters, citing strong labor markets, solid payroll growth and strong corporate and household balance sheets. . “Everything indicates that it is a strong economy, and one that can thrive in the face of a less accommodative monetary policy.”

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