JPMorgan sees four potential outcomes for the economy, and only one of them is good

Published Tue, Nov 22 20221:07 PM EST

The global economy faces four likely scenarios ahead — none particularly great — though there's a 1-in-5 chance that a recession doesn't take hold, according to JPMorgan Chase economists. In the firm's most likely case, the U.S. probably hits a contraction in the latter part of 2023. Other possible outcomes are a recession late next year or in 2024. In the worst case, the economy tips over into recession during the early part of 2023. "Circumstances warrant considering a range of scenarios," JPMorgan chief economist Bruce Kassman and others wrote in a report for clients. "The dominant event across the four scenarios presented is a US recession before the end of 2024. But the timing of this break, the path of Fed policy, and the reverberations for the rest of the world vary." Much depends on how monetary policy tightening from the Federal Reserve and other global central banks plays out. The Fed and its counterparts have raised benchmark interest rates dozens of time this year in an effort to control inflation running at its highest levels in four decades. JPMorgan's most likely case, carrying a 32% probability, sees a recession taking hold in a year or so as the lagged impact of monetary policy tightening gradually erodes growth. "While avoiding a near-term recession, our baseline assumes that the US slips into a mild recession in late 2023," the firm said. "This scenario places the building drag on US credit conditions and rising dollar at the center of the outlook." Kassman and his team expect the fed funds rate to hit 5% in 2023, about in line with market pricing. Rising interest rates have resulted in a strengthening dollar , which is up about 12% year to date against a basket of its global peers. That currency trend in turn has seen the U.S. export inflation to other countries that hold large amounts of dollar-denominated debt. In the second-most likely scenario, JPMorgan assigns a 28% chance of no recession until 2024. The event is delayed amid hopes that a Fed pause in rate hikes coincides with falling inflation and resilient growth. However, the optimistic outlook fails to materialize. "The hope behind the pause — that restrictive stances will gradually bring inflation back into comfort zones— is not realized," Kassman wrote. "With elevated inflation becoming embedded, policy rates will need to rise materially further and a global recession takes hold in 2024." The other two scenarios carry equal 20% probabilities. One is that the "damage [is] already done" and the global economy is headed for contraction. This is the least-positive set of circumstances. "There are sufficient supports to avoid a recession at the start of 2023, but we think it would be a mistake to ignore the risks associated with tightening financial conditions and weakness in Europe [and] in China," Kassman said. "We see a one-fifth risk that the US breaks together with Europe and pulls the global economy down early next year." Finally, the most encouraging outlook is another 20% chance of a "soft landing" in which the Fed can hold its aggressive stance and bring down inflation without wrecking the economy. "We think it is a mistake to rule out a soft-landing scenario (20% prob.) in which recession is avoided," the note said. "Under this scenario, sluggish growth and the removal of supply-side constraints are sufficient to push inflation down towards 2% without a sharp deterioration in labor markets. With growth running at a modest pace, central banks can begin to normalize policy stances in late 2023, laying the groundwork for an extended global expansion." JPMorgan isn't the only forecasting firm on Wall Street that sees at least a reasonable chance that the Fed can keep the economy out of recession. Over the weekend, Goldman Sachs also issued an outlook in which it said the economy is likely to see a "soft" or "softish" landing, though it expects GDP growth of just 1% or so next year.