Global Investment Bank "US Recession Probability 30-40%"... Diverging Currency Exchange Rate Forecasts

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] Global investment banks (IBs) have estimated the probability of an economic recession within the next year at 30-40% due to financial tightening caused by the aggressive interest rate hikes by the U.S. Federal Reserve (Fed). The expected peak timing of U.S. inflation has been delayed to around August, and the year-end policy interest rate is projected to reach 3.5-3.75%.

The Korea Bank Foreign Exchange Operations Department announced on the 23rd that major investment banks expressed these views during the '2022 Second Half International Financial Market Outlook Webinar,' held from the 30th of last month to the 17th of this month.

Most investment banks forecast that economic growth will slow more than initially expected due to financial tightening from the Fed's aggressive interest rate hikes. They estimated the probability of a U.S. recession within the next year at 30-40%, which is lower than the recent Wall Street Journal survey (44%). However, Goldman Sachs (GS) recently raised its recession probability from 15% to 30%.

Regarding U.S. inflation, the expected peak timing was postponed to around August following the May Consumer Price Index (CPI) release. Some mentioned the possibility that high inflation may persist thereafter.

Concerning monetary policy, despite aggressive rate hikes, recent inflation driven by global supply chain disruptions and rising food and energy prices due to geopolitical risks is considered difficult to address with existing policy tools. Credit Suisse (CS) analyzed that if interest rate hikes are not sufficient to cause a recession, inflation cannot be stabilized.

In particular, for the second half of the year, institutions presented divergent forecasts regarding U.S. Treasury yields and exchange rates. The Fed's policy rate is expected to reach 3.5-3.75% by the end of this year, with the terminal rate next year projected at 3.5-4.5%.

The U.S. Treasury yield (10-year) is forecasted to remain in a flattening yield curve trend during the second half, ending the year around 3.2-3.5%, although HSBC expects it to fall to 2.5% reflecting economic slowdown prospects.

The U.S. dollar is generally expected to maintain strength, but views on the euro were mixed. JP Morgan expressed the view that the euro could strengthen to parity (1 euro = 1 dollar), while GS forecasted weakness.

This content was produced with the assistance of AI translation services.