If Wall Street were wrong about the odds of a recession in 2023 and 2024, forecasting for next year wouldn’t be any easier, Cambridge economist Mohamed El-Erian wrote in Project Syndicate.
He said the chances of a U.S. soft landing scenario remain strong in the near term, but three key risks will determine the actual likelihood of such a landing.
First, all eyes are on the Federal Reserve to see whether it will double down on its quest for 2% inflation or whether it can live with a slightly higher rate.
According to El-Erian, the central bank’s fixation on this figure could put it between a rock and a hard place, in the event that US growth begins to slow before the target is reached.
In fact, the first quarter is already showing signs of this, with the latest GDP figure falling sharply in the face of higher-than-expected inflation. This led to “stagflationary” alarm on Wall Street, a situation the Fed could only combat by raising interest rates.
Since last year, El-Erian has warned that inflation in 2024 will remain stuck between 3 and 4 percent and called on the Fed to readjust its target by a higher percentage; otherwise, the central bank risks crushing the economy to achieve its goal, he has previously said.
Second, the U.S. growth trajectory will also depend on consumer spending, but particularly among low-income households. Although U.S. consumption has generally remained strong, lower income brackets have been hardest hit by a declining environment. The cohort is increasingly strained by higher debt and eroded savings.
“Given high interest rates and the loss of enthusiasm among some creditors, this cohort’s willingness to consume will depend on whether the labor market remains tight,” El-Erian wrote.
Third, American growth is at the mercy of the direction the broader narrative takes – which could mean either a surge in innovation or an international disruption:
“While technological advances promise a new favorable supply shock that could unlock higher growth and lower inflation, geopolitical developments could have the opposite effect and limit the scope of macroeconomic policy,” he said. -he declares.
For example, while technologies like generative AI and sustainable energy could drive transformative growth for at least a few years, international conflicts could trigger stagflationary instability – as in the case of crude surpassing $100 per month. barrel, El-Erian wrote.
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