A new report from AM Best has cited that with economic activity expected to slow in 2023, and the likelihood that the Federal Reserve will continue to tighten monetary policy, the probability of the US economy falling into a recession over the next 12 months is steadily rising.
In Best’s report, ‘US Economy: Recession on the Horizon for 2023?’, the rating agency has addressed how key economic drivers performed throughout 2022, such as consumer spending and labor and housing market trends, with expectations for 2023.
According to the report, economic activity in the US was “remarkably resilient” in 2022, despite a slow start to the year. During H122, the economy fell into a technical recession, with economic activity contracting by 1.6% in Q1, and by 0.6% in Q2.
Best noted that weakness during H122 was largely due to a rise in COVID-19 cases due to the Omicron wave during Q1, as well as high inflation, tightening financial conditions, plummeting consumer and business sentiment, a slowdown in private and residential investment, and a decline in government spending.
The economy did return to growth later in the year, with GDP increasing by 3.2% in Q3, and by 2.9% in Q4.
However, Best stated that most forecasters have cut their 2023 GDP projections given the ongoing impacts of tighter financial conditions. This is owed to the fed’s “aggressive tightening cycle”, as well as persistent higher prices, and the potential for weaker corporate earnings and higher borrowing rates.
Additionally, geopolitical tensions, China’s unwinding of its zero COVID-19 policy, and its impacts on supply chains and global growth, as well as a slowdown in global economic activity, could also impact US economic growth negatively.
Ann Modica, director, credit rating criteria, research and analytics, AM Best, said: “Even if economists don’t believe the United States will enter into a recession in 2023, many believe economic growth will slow. In December, the Fed revised their real GDP growth forecast for 2023 to 0.5%, a downward revision from September, when the forecast was 1.2%.”
Furthermore, Best adds that even though inflation has declined from its mid-2022 peak, it still remains well above pre-pandemic trends and the Fed’s target of 2%.
Best notes that the process of bringing inflation in line with the Fed’s target will likely take longer than initially expected, and that it will remain elevated in 2023 and perhaps, even beyond.
The report also cites high inflation, recession fears and aggressive monetary tightening as being among the many key factors that led to the equity markets having its worst year since 2008, and bonds having one of the worst years on record, particularly ones with longer-dated durations.
Best concludes by stating that in 2023, the markets will likely continue to experience heightened volatility, particularly during the H1.