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. 

     

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