Goldman Sachs predicts that there is about a 35% chance the economy will fall into a recession during the next two years.
Despite speculation among some economists that a recession is on the horizon, Goldman Sachs strategists, led by David Kostin, said in a Wednesday research report that a recession “is not inevitable.”
“Rotations within the US equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data,” the report said.
The stock market has been tanking in recent weeks, increasing chatter of a possible recession.
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On Wednesday, the same day as the report, the Dow Jones Industrial Average lost more than 1,100 points, or 3.5%, the worst single-day loss since the COVID-19 pandemic struck in the spring of 2020. The tech-heavy Nasdaq plummeted by about 4.7%, and the S&P 500 closed down more than 4%.
The Dow is down more than 14% since the start of the year, the Nasdaq is off nearly 28%, and the S&P 500 has fallen about 18.2%.
One of the major drivers of the stock selloff and a big factor in why some are predicting a recession is the Federal Reserve’s plan to raise interest rates. The central bank increased its interest rate target by a quarter percentage point in March and subsequently jacked up rates by a half percentage point earlier this month.
The half-point hike is akin to two rate increases at once and signals that the Fed is increasingly worried about the country’s breakneck inflation. The last time the central bank took such an aggressive tack was more than two decades ago.
JPMorgan Chase strategist Marko Kolanovic also said he doesn’t think that the economy will sink into a recession. He said that stock prices, while cratering right now, will bounce back up and expressed doubt about the chance of a recession.
“We can climb out of this hole,” he said during a recent interview. “There will be no recession this year, some summer increase in consumer activity on the back of reopening, China increasing monetary and fiscal measures.”
In contrast to Goldman Sachs and JPMorgan, Deutsche Bank became the first major firm to predict a recession coming in the next year. Researchers reasoned that the Fed will have to hike interest rates even more aggressively than markets are already pricing in, a prospect that will slow the economy to the point of recession.
“We regard it ... as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists said in a report.
Treasury Secretary Janet Yellen also raised eyebrows this week when she invoked stagflation, which is when inflation is running hot while the economy and labor market slump.
“The economic outlook globally is challenging and uncertain, and higher food and energy prices are having stagflationary effects, mainly depressing output and spending and raising inflation all around the world,” she said to reporters ahead of a G-7 finance ministers meeting in Germany.
Former Federal Reserve Chairman Ben Bernanke has also suggested that the country might be in for a period of stagflation, according to the New York Times.
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“Even under the benign scenario, we should have a slowing economy,” Bernanke said of the country’s current situation. “And inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit, and inflation is still high,” he said.
“So, you could call that stagflation,” the former Fed chief added.