Recently, on a CBS program, Goldman Sachs President Lloyd Blankfein urged American companies and people to prepare for a recession scenario. This possibility is currently “very, very high” and is almost “not just speculation anymore”, he said. “If I was running a big company, I would prepare for that scenario. If I was a consumer, I would do the same thing,” said Mr. Lloyd Blankfein.
The reason is because US inflation is at a very high level, a consequence of the huge economic stimulus package, supply chain disruption, “Zero COVID” and the tense situation of war in Russia-Ukraine.
Mr. Blankfein’s comments came shortly after Goldman Sachs lowered its US economic growth forecast for this year and next – a move that clearly reflects the recent sharp fluctuations in the Wall Street market. Specifically, the gross domestic product (GDP) of the US in 2022 only increased by 2.4%, lower than the previous forecast of 2.6%. Growth in the world’s largest economy in 2023 is also only 1.6% compared with the forecast figure of 2.2%.
Goldman Sachs lowers US economic growth forecast for this year and next
Like Mr. Lloyd Blankfein, most Wall Street experts are warning about the risk of a US recession. This scenario is said to be able to happen soon in the next few months, but the shape and development is still a question mark. Economists name them as letters, and predicting which letter is appropriate for the current economic situation is not easy.
“From the COVID-19 pandemic, the tension between the Russian-Ukrainian conflict to the energy crisis, the challenges keep popping up,” said Nick Tell, CEO of investment bank Armory Group.
The expert also asserted that what made the difference in this recession was “the psychological impact on the workforce as well as the large amount of subsidies pushed into the economy by the government.” ‘. Before that, the scenario of labor shortage leading to a recession occurred only in wartime.
“If we look at the disparity between the total job supply and the number of Americans unemployed, we see an unprecedented problem,” said David Lebovitz, global market strategist at JP Morgan Asset Management said. “They remind me of past recessions.”
Wall Street experts are warning about the risk of US recession
So if it is true that America is in the grip of a recession, what shape will it take?
“I think the recession and recovery will be U-shaped. This is something we haven’t seen for a long time,” said Tell.
According to CNN, a U-shaped recession signals a strong downward momentum. The recession will last for 1 or 2 years like the period 1973-1975, when the oil crisis and the policies of the US Federal Reserve made the US economy face many uncertainties.
Simon Johnson, a former chief economist at the International Monetary Fund, likened this kind of recession to being stuck in a bathtub. “You’re in there and the sides are slippery. It’s going to be difficult to get out for a long time,” he said.
According to Nick Tell, the economy will need to slow down for a while before the labor force and unemployment rate return to normal. This process helps to stabilize the economy, but it can take a few years.
For the V-model, GDP falls quickly but also bounces back quickly. This is considered the best scenario when a country has a recession.
“It’s an imbalance,” says David Lebovitz. “For example, the tech stock bubble was created by an imbalance in valuations. The housing imbalance also created the 2008 financial crisis. But for now, we are. We have not seen any imbalances large enough to cause serious harm to the economy.”
US recession scenario
Therefore, Mr. Lebovitz predicts the upcoming recession will be quite mild, and encourages investors to “lay in” for the next 12-18 months. “If your portfolio has dropped 20%, don’t sell anymore. Take this opportunity to rebalance the portfolio,” he said.
If the scenario plays out in a W-shape, the US will fall into a recession, then recover and continue to have a second recession. This process is especially painful for investors who rush to pour money into the stock market. securities because they believe that the economy has recovered.
This scenario happened in 1980, when the US was in a recession for 6 months, then recovered and then in another recession for 16 months. Experts say that if the Fed is not resolute enough in raising interest rates, the possibility of a W model appearing is very high.
An L-shaped recession is something America wants to avoid at all costs. The economy will slow down for a long time, a large number of workers will be unemployed and factories will be forced to shut down. The Great Recession of the 1930s and the financial crisis of 2008 both followed this pattern. Accordingly, it took the US 6 years to return to the GDP mark in 2007.
If the scenario follows a K-shape, the recovery rate of sectors in the economy is different, depending on key industries, geographic location and asset size. The difference between the components will then be proportional to the income inequality.
US inflation is at an alarming rate
Many people think that the recession in 2020 will follow a V-shape, but others think that the economy actually follows a K-shape. The reason is because office workers recover their assets quickly. Thanks to the government’s stimulus policies, the stock market rallied and house prices rebounded. Meanwhile, the group with no savings, serving in the restaurant service sector still suffered significant losses.
Comments on the possibility of a recession by Goldman Sachs and Mr. Blankfein personally added to the recent pessimistic assessments of the US economy. The US consumer price index (CPI) in April increased by 8.3% year-on-year, down slightly from March but still among the highest in decades.
To address the alarm bells of inflation, the FED decided to raise the federal funds rate by 0.5 percentage points. Lending interest rates applied to banks across the state will accordingly be raised from the current 0.25%-0.5% range to 0.75%-1%.
“Inflation is too high and we understand the difficulties that inflation causes. Therefore, we must act urgently,” said Fed Chairman Jerome Powell.
However, this leader also frankly admitted that bringing inflation under control could disrupt the economic growth momentum. A “soft landing” was also not guaranteed by Mr. Powell.
Fed Chairman Jerome Powell
“A soft landing means bringing inflation back to the target threshold of 2% but still maintaining strength for the labor market. For a number of reasons, this is a very difficult task,'” Mr. Powell said.
It is not known how “difficult” Mr. Powell mentioned, but if the Fed does not aggressively fight inflation, the US economy will suffer even more damage, and more seriously, fall into a recession. double recession.
“Double recession could happen if the Fed is too cautious when it comes to bringing inflation under control,” said Seema Shah, chief global strategist at Principal Global Investors.
However, in a positive way, the growth deceleration is considered necessary to help the US bring inflation back to the Fed’s 2% target. The economic slowdown is certain to drive up unemployment, but Goldman Sachs remains optimistic that they won’t be pushed too far.
According to: CNN, Bloomberg
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