Bank of America warns that high inflation poses a credible threat to the economic recovery that began just two years ago.
“The ‘inflation shock’ is getting worse, the ‘rate shock’ is just beginning, the ‘recession shock’ is coming,” wrote Michael Hartnett, Bank of America’s chief investment strategist, in a note. to customers on Friday.
The warning came ahead of a new government report on Tuesday which showed consumer prices jumped 8.5% in March, the fastest pace since December 1981. There were record price rises of a year-over-year on everything from new vehicles and men’s clothing to baby food. and dressing.
Inflation is “out of control,” Hartnett wrote, adding, “Inflation causes recessions.”
Although the last recession was triggered by a pandemic, economic expansions are often interrupted by the sharp braking of the Federal Reserve to combat rising inflation.
Markets are bracing for the Fed to rapidly raise interest rates, at the fastest pace in decades, to bring prices under control. The risk is that the central bank will overdo it, sinking the economy in the process.
Markets “in recession”
Bank of America is not categorically calling for a recession in the United States. But the bank is raising the specter of a slowdown and signaling signs of recession on Wall Street.
Hartnett noted that the price action in financial markets has been very “recessive”, citing sharp declines for economically sensitive homebuilders, semiconductor makers, small caps, retail and capital. -investment.
Global growth expectations plunged to record lows in April among investment fund managers surveyed by Bank of America, according to a separate report on Monday.
This survey also showed that investors’ earnings expectations have fallen to their lowest level since March 2020, approaching levels seen in other crises, including the collapse of Lehman Brothers in 2008 and the breakout of the Internet bubble in 2001.
Last week, Deutsche Bank became the first major bank to predict a recession. The bank expects the Fed to push the economy into a “mild” slowdown that will begin in late 2023.
Refrigeration job market
But others think the Fed might be able to bring inflation under control without causing a recession.
To rein in inflation, Goldman Sachs said in a report late Monday that economic growth must slow to a “modestly below-trend pace — enough to persuade companies to put some of their expansion plans on hold, but not to the point to trigger deep cuts in current production and employment.
When labor demand drops significantly, downturns tend to follow. There has never been an increase in the unemployment rate of more than 0.35 percentage points on a three-month average that has not been associated with a recession, Goldman Sachs said.
Although the overheated labor market has “significantly increased the risk of recession”, the bank does not currently expect a recession in the United States.
Goldman Sachs said its relative optimism was based on strong corporate and family balance sheets and its belief that the labor market cooling should be aided by the post-Covid normalization process that will allow more workers to retire. .