Economic alarm bells are ringing loudly in the ears of major financial institutions. HSBC Asset Management, a division of Europe’s largest bank, warns that the United States is poised to descend into a recession before the close of this year.
Not only that, but this fiscal downturn, it suggests, could be a foreboding precursor to a broader European recession come 2024.
A prominent voice from HSBC, Joseph Little, the Global Chief Strategist, paints a worrying picture of an economy standing on precarious ground.
According to Little, while parts of the economy have shown resilience, there is an increasing risk of a recession. This is particularly evident in the gradual creep of corporate defaults and a noticeable profit downturn.
In the midst of these concerning trends, Little finds a silver lining. HSBC expects the recent period of high inflation to moderate swiftly, creating room for policy-makers to reduce interest rates.
This remains an intriguing forecast, considering the hawkish stance of central bankers and persistent inflation, particularly at its core level.
Despite these factors, HSBC anticipates the U.S. Federal Reserve to slice interest rates before 2023 concludes.
The European Central Bank and the Bank of England are predicted to follow suit in the upcoming year. Notably, the Fed recently paused its monetary tightening cycle in June but hinted at two more potential hikes this year.
The recession crystal ball: An echo of the 1990s?
Little notes that if inflation remains stubbornly above the target in numerous economies, central bankers will find their hands tied from cutting rates. As such, it becomes crucial that a recession doesn’t strike too soon, causing deflation.
Drawing parallels from history, Little suggests that the upcoming recession could mirror that of the early 1990s, with an estimated 1-2% GDP drawdown.
The impending recession, according to HSBC, would present a tricky and volatile market outlook. The reasons for this outlook are twofold. First, there’s the quick tightening of financial conditions leading to a credit cycle downturn. Secondly, the markets don’t appear to anticipate a pessimistic worldview.
The upcoming recession, Little cautions, may not be potent enough to flush out all inflation pressures from the system.
Consequently, developed economies might grapple with higher inflation and interest rates over time. HSBC, therefore, maintains a cautious stance towards risk and cyclicality in portfolios.
Meanwhile, as China recovers from years of strict Covid-19 protocols, HSBC views the high domestic savings levels as a potential catalyst for demand. Besides, the Chinese government’s fiscal measures could boost employment.
The comparatively low inflation in China implies the possibility of further monetary easing and GDP growth exceeding the government’s modest 5% target.
Apart from China, India is seen as another growth story for 2023. The Indian economy has shown robust recovery from the pandemic, spurred by increased consumer spending and a strong services sector.
This forecast comes amidst recent debates on whether the U.S. can dodge an imminent recession. Janet Yellen, the U.S. Treasury Secretary, shares an optimistic view that the economy remains robust despite uncertainty.
However, HSBC’s prediction of an upcoming recession could change the economic narrative in the coming months, heralding a new era of global financial turbulence.