Interview, Fireside Chat
The recession question
- U.S. economic growth is expected to face significant headwinds from tariffs, with a potential 20–25 percentage point rate increase projected to reduce growth by 2–2.5 percentage points, potentially triggering a recession given a trend growth rate of approximately 2%.
- Current U.S. recession probabilities are estimated at 45% to 50% following a three-month tariff delay, while Q4 to Q4 U.S. GDP growth is forecast at only 0.5% for the current year.
- Inflation is anticipated to accelerate by nearly one percentage point once tariff impacts are fully realized, with core PCE inflation projected at 3.5% and short-term price levels expected to rise significantly.
- Federal Reserve policy is currently forecast to include 75 basis points of rate cuts across June, July, and September, though no cuts may occur if growth holds up; in a recession scenario, cuts could reach 200 basis points.
- Treasury yields and long-dated rates are expected to face pressure from rising fiscal concerns, foreign investor withdrawal, and market deleveraging, with new highs in yields predicted in the coming weeks.
- Equity and credit markets are viewed as likely to decline further if correctly priced for recession risk, with limited upside scope due to weak growth dynamics.
- The U.S. dollar is forecast to experience extended weakness throughout the year, accompanied by an appreciation of core G10 currencies such as the euro, yen, Swiss franc, and sterling.
- China's economic outlook includes a GDP growth forecast reduction to 4% for the current year and 3.5% for the next, driven by retaliatory tariffs and offset only partially by planned stimulus measures.
- Global growth forecasts are broadly negative, with 21 or 22 of the 25 largest economies expected to see downward revisions, while only Argentina has seen an upward adjustment.
- Investment is expected to remain subdued for the foreseeable future due to uncertainty, with a risk that the economic drag could become nonlinear if trade policy uncertainty persists.
- Investors are shifting toward defensive positioning, including increased hedging activity and long positions in safe-haven assets like gold and select currencies, although hedging costs are currently high.
- Market stress monitoring is expected to intensify, with a focus on liquidity conditions and secondary effects, as key economic data releases may be distorted by pre-buying behaviors related to tariff implementation.