The US should brace for a “boil the frog” recession as widespread monetary tightening brought on by stubbornly high inflation leads to a synchronized global downturn, according to JPMorgan.
The term “boiling the frog” is commonly used to describe a situation where people fail to act on a potential problem until it gets more severe and eventually bubbles over.
The firm said that’s the most likely outcome out of four potential scenarios it laid out for 2023 and 2024. On the whole, JPMorgan says a recession is more likely than not to happen.
The most likely outcome — to which the economists assigned a 36% probability — involves the US tipping into recession at the same time as the rest of the global economy. The main catalyst for that will be aggressive monetary tightening in response to inflation, which JPMorgan expects to stay persistently elevated.
Though Fed officials paused interest rates at their policy meeting in June, the US economy is still running hot, with a robust labor market and prices still well-above the Fed’s 2% target.
“Central bank aspirations for a soft landing have tempered the pace of tightening. However, hopes for a painless slide in inflation back to target are likely to be dashed, requiring policy to turn sufficiently restrictive to break the back of the expansion,” the economists said.
“Broad-based developed-market tightening points to a more synchronized global downturn sometime in 2024,” they added.
The second-most likely outcome is a “slip-sliding away” recession, which economists say has a 32% chance of happening. That scenario involves a mild US recession in late 2023 to early 2024, as a continuation of the ongoing credit crunch pushes the US into a downturn while other economies around the world remain resilient.
Meanwhile, JPMorgan says the US only has a 23% chance of a Goldilocks soft-landing scenario, a situation where the economy avoids a recession altogether. It also sees a 10% chance the US will slip into an immediate recession in mid-2023.
Experts have been flagging risk of recession for the past year as inflation touched a 41-year-high and prompted the Fed to raise interest rates over 1,700% to reign in the economy. Rates are now at their highest range since 2007, a level that could easily push the US into a downturn.
Fed officials have warned rates could tread higher this year as it continues to get a handle on inflation. Markets are pricing in a 74% chance the Fed will raise rates another 25 basis-points in July, lifting the Fed funds target range to 5.25-5.5%. Meanwhile, the New York Fed has forecasted a 71% chance the US will slip into recession by May 2024.
