Fed’s rate hikes, inflation pressure and recession were the key issues in H1 2022. What do investment banks think of these issues in H2 2022? Citi felt optimistic while JPMorgan and others were pessimistic.
Morgan Stanley: Global GDP Growth Will Be 2.9% in 2022—Less Than Half That of 2021
Morgan Stanley Chief Global Economist Seth Carpenter thinks we are in the most chaotic, hard-to-predict macroeconomic time in decades.
Global economic activity is slowing sharply—so much so that Carpenter and his team have revised their global gross domestic product forecasts down 170 basis points over the last three months—and the risks of further slowing are front and center.
Nevertheless, the team believes that the global economy will manage to avoid a true recession in 2022. Under their base case—what they consider the most probable—global GDP growth will be 2.9% in 2022—less than half that of 2021, when massive fiscal stimulus, accommodative monetary policy and COVID-19 business rebounds buoyed growth 6.2%.
For now, he says, the biggest risks—namely, a European embargo on imports of oil from Russia and persistent Covid lockdowns in China—are not likely to occur in tandem. The alignment of those unlucky stars is possible, hence the rising risk, but it is not something we would count on.
Citi: Global Equities and Bonds May Make Modest Gains for the Rest of 2022
The boom conditions of 2021 are over, but this does not mean a recession will be forthcoming. Amid economic uncertainty, positive actions for portfolios are recommended.
Following a the COVID economic collapse and boom, we now face economic uncertainties amid geopolitical tensions, rising inflation and slowing growth.
If the US Federal Reserve ceases tightening in time, we believe economic expansion can be sustained, forestalling a recession.
Despite heavy declines in some technology equities, contracting capital expenditure on technology seems improbable, unlike in the early 2000s.
It is time to build resilient portfolios, with a focus on high-quality investments across asset classes.
Goldman Sachs: It Sees 30% Chance of U.S. Recession Next Year
It forecasts a 30% chance of the U.S. economy tipping into recession over the next year, up from 15% earlier, following record-high inflation and a weak macroeconomic backdrop due to the Ukraine conflict.
"We are increasingly concerned that the Fed leadership has set a high and inflation-specific bar for slowing the pace of tightening," Goldman said.
It forecasts a 48% cumulative probability of a recession over the next two years compared to its prior forecast of 35%.
"Our best guess is that a recession caused by moderate overtightening would be shallow, though we could imagine it dragging on for a little longer than it would with more policy support," economists at Goldman added.
BofA: U.S. Economy Has 40% Chance of Being in Recession Next Year
BofA Securities economists see roughly a 40% chance of a U.S. recession next year, with inflation remaining persistently high.
They expect U.S. Gross Domestic Product growth to slow to almost zero by the second half of next year as the lagged impact of tighter financial conditions cools the economy, while they see just a modest rebound in growth in 2024.
"Our worst fears around the Fed have been confirmed: they fell way behind the curve and are now playing a dangerous game of catch up"They wrote, adding that the firm expects the Fed to hike interest rates to above 4%.
They now expect global economic growth of 3.2%. They said they had forecast 4.3% global growth going into 2022, and see further risks to 2022 growth if strict lockdowns continue in China, and to 2023 growth if the U.S. economy slips into recession.
The spike in energy prices amid the Russia-Ukraine war "has already sent inflation soaring across the world, which in turn has forced central banks into a more hawkish stance," the economists wrote.
Deutsche Bank: We Have 50% Likelihood of a Recession Globally
Deutsche Bank AG’s chief executive officer warned the global economy may be headed for a recession as central banks step up efforts to curb inflation, joining a growing chorus of executives and policy makers who are painting a pessimistic picture.
He said the global economy is buckling under multiple strains, from supply-chain issues in China to rising food prices, particularly in the poorest countries. While the bank had predicted for some time that interest rates would rise to curb price increases, the pace at which central banks are now expected to tighten surprised him.
“At least I would say we have 50% likelihood of a recession globally,” the Deutsche Bank CEO said in an interview. In the US and Europe, “the likelihood of a recession coming in the second half of 2023, while at the same time the interest rates go up, is obviously up versus the forecasts we had before the war broke out” in Ukraine.
JPMorgan: It Cut US Economic Growth Forecasts Perilously Close to Recession
It reduced its estimate for annualized gross domestic product growth to 1% for the second quarter, down from 2.5% previously. This quarter is also seen at 1%, down from 2%. Growth will tick up to 1.5% in the final three months of the year, helped by stronger car production and lower inflation, the bank’s economists said.
“Our forecast comes perilously close to a recession,” Michael Feroli, JPMorgan’s chief US economist, wrote in a note. “However, we continue to look for the economy to expand, in part because we think employers may be reluctant to shed workers, even in a period of soft product demand.”
Wells Fargo’s 2022 Midyear Outlook: Faster, Further, and Fragile
It anticipates that while the economic cycle runs faster and the interest rate increases run further, the economy and capital markets will remain fragile.
It believes the U.S. economy is signaling a mild recession for the end of 2022 and into early 2023. If inflation and monetary tightening ease in 2023, as it anticipates, a nascent economic recovery that markets may project into 2024 is expected.
The report examines and identifies where it may pay investors to take risks — and what investment opportunities may arise — as they navigate these challenging times.
“Thus far, 2022 has been trying for investors, with negative year to date returns for both equities and bonds,” said Darrell Cronk, chief investment officer for Wealth & Investment Management.
“As we look into the second half of the year, important risks remain. It views risk not strictly as an unknown but as something to measure, and as part of a disciplined decision process to manage within a portfolio.”
UBS: The Odds of a Hard Landing for the U.S. Economy Are Rising
UBS economists, led by Jonathan Pingle, said in a note that “the risk of a hard landing is rising”.
“Recession risks are rising. Growth is slowing sharply. Pandemic policy support is being removed rapidly. Prices are eroding real income. The economy looks increasingly vulnerable to any new negative shock,” they wrote.
UBS still believes a “soft landing” is the most likely outcome for the U.S. economy, but the investment bank’s economists now see a 40% chance of an outright recession over the next 12 months, up from just 2.5% a month ago.
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