Is Recession Inevitable?

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Morgan Stanley | The probability of recession especially in the US has increased for most investors in recent weeks. Indeed, our analyst Ellen Zentner has revised her growth estimates downwards (on a 4Q/4Q basis): -10bps for 2023 (to 0.3%) and -20bps in 2024 (to 1%).

Even in the case of avoiding technical recession, the impact on the labour market would be unavoidable: the macro team expects new jobs to be at a minimum in 4Q23/1Q23 at 40k/month bringing unemployment to 4.1% in 4Q23. However, they see some support from labour participation that could keep unemployment relatively moderate. In any case, investors’ certainty is low due to the current environment of rising financing costs and tightening access to credit and the uncertain impact this may have on the real economy.

In this regard, the macro team has estimated that for every 1pp negative shock to US credit growth, there is a 20bps negative impact on US real GDP. That said, while the probability of recession is higher in the US than in Europe, where in fact the macro team has revised upwards its 2023 growth estimates (to +0.8%Y) on the basis of recent macro strength, US contagion effects should not be ignored.

Although the situation of European banks is different from that of US banks (more liquidity and capital) the macro team warns that even 1pp of lower loan growth would have a negative impact of -25bps on GDP.

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