We no longer think the U.S. economy will be able to avoid a recession. Credit standards already had deteriorated significantly before the Silicon Valley Bank failure, and the likely further significant tightening in the wake of the crisis will be the final straw. We now see U.S. GDP falling by 1½% annualised in Q2 and Q3, respectively, before rebounding only slightly in the fourth quarter, with a 1% increase. This change in the economy will prompt a shift from the Fed, eventually. We still think the FOMC will lift its policy rate by 25bp next month, but this will be the last hike. We then think the Fed will be on hold until September, at which point conditions will force a reversal. We see three 25bp rate cuts this year, in September, November and December, followed by 100bp next year. This will be enough to revive growth next year, but in the near term, we now think the economy faces a setback. The good news is that the recession will not be anywhere near as grim as the crash in 2008, because private sector balance sheets are in much better shape.
Ian Shepherdson, Chief Economist