Rate Hikes To Push US Into Recession Later This Year, Fitch Says

Fitch Ratings said the impacts of interest rate hikes on the real economy still lie ahead and are likely to push the US economy into recession later this year.

“Central banks are now taking away the punchbowl quite quickly. It is only a matter of time before the impact on the real economy becomes much more visible,” Brian Coulton, chief economist at Fitch, said in a statement.

The rating agency, however, said the global growth prospects for 2023 have improved significantly since December, according to its Global Economic Outlook (GEO) report.

The improvement in the near-term outlook reflects China’s post-Covid-19 reopening, a material easing of the European natural gas crisis, and surprising near-term resilience in US consumer demand, Fitch said. This is the first upgrade to Fitch’s year-ahead world growth forecasts since the start of the Russia-Ukraine war, it noted.

Fitch now expects world growth in 2023 at 2%, up from 1.4% in the December 2022 GEO. It raised China’s 2023 growth forecast to 5.2% from 4.1% in December, eurozone growth to 0.8% from 0.2% and US growth to 1.0% from 0.2%.

The rating agency, however, lowered global growth for 2024 to 2.4% from 2.7% to reflect the lagged impact of rapid US Federal Reserve and European Central Bank (ECB) interest rate hikes.

‘Weigh Heavily’

Fitch said the US economy has more near-term momentum than anticipated, with robust employment and consumption growth at the start of the year. Household income growth is holding up and savings buffers built up in the pandemic will support spending for a while, it added.

Headline inflation looks to have peaked, but core inflation is stubbornly high and the Fed and ECB have become more concerned about inflation becoming entrenched, the rating agency said, noting that labor market imbalances - a source of wage pressure - are not improving.

Fitch expects the Fed Funds to peak at 5.5% and ECB’s Main Refinancing Operations rate at 4% in June, up by 50 basis points (bps) and 100 bps, respectively, since December.

The rating agency said the monetary tightening is taking longer to slow US demand than expected, but the 525 bps of rate rises in just 15 months will ultimately ‘weigh heavily’ on activity.

“We still forecast a US recession, albeit starting in 3Q23 - several months later than in our previous forecast and a few months after the peak in Fed Funds,” it added.

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