Key Takeaways
The US economy has been remarkably resilient in the face of high interest rates, which alongside a rapid drop in inflation, has raised hopes for a soft landing.
Certainly, some of the imbalances driving inflation have eased in a benign manner, without the need for slower growth.
Moreover, the rebound in interest sensitive activity alongside easing financial conditions could suggest the worst of the policy headwinds have passed.
However, underlying inflation is still too hot, and likely requires a deeper labour market adjustment to be brought sustainably back to target.
We think this shock is coming as the strong balance sheets that have so far insulated households and businesses from high interest rates start to crack.
We think this shock is coming as the strong balance sheets that have so far insulated households and businesses from high interest rates start to crack.
Slower spending will add to the drag on corporate profits and margins, alongside building interest costs, triggering a retrenchment in capex and hiring.
The contours of the downturn we are forecasting have changed. We now expect the recession to come later (mid-2024) and to be milder than previously feared.
These judgements are very close calls. A soft landing remains our second most likely scenario, and we have increased the probability we assign to it. Indeed, we continue to emphasise that a scenario-based approach to forecasting is most useful when comparing our views to market pricing.