S&P Cuts US 2023 GDP to 1.6% as Fed’s Rate Hikes Risk Recession

The S&P 500 has revised down the U.S. GDP forecast in 2023 to 1.6% from earlier forecast of 2.0% due to the supply crunch and higher prices amid aggressive moves by the Federal Reserve in hiking interest rates.

The S&P wrote in a note that it expected the economic momentum will likely protect the U.S. economy from recession in 2022. While maintaining 2022 GDP growth forecast at 2.4%, the S&P lowered 2023 GDP forecast from 2.0% to 1.6%, saying that it is hard to see the economy walking out of 2023 unscathed amid supply-chain disruptions worsening as the weight of extremely high prices damage purchasing power and aggressive Federal Reserve policy increases borrowing costs.

“The Fed will keep monetary policy tight until inflation decelerates and nears its target in second-quarter 2024,” the global rating agency wrote in the report.

The S&P also expected the labour market, which has had a strong recovery from the Covid-19 pandemic, will struggle as Fed hikes continue. The unemployment rate was expected to rise from 3.6% last month to 4.3% by the end of 2023 and more than 5% by the end of 2025.

The firm touched on recession, stating that the baseline signals a low-growth recession, but the chances of a technical recession are rising. S&P assessed recession risk at 40% next year, reflecting a larger spike in prices with even more aggressive Fed’s policy heading into 2023. Meanwhile, an increased uncertainty over the Russia and Ukraine war could widen recession risk to 45%. S&P said it expected the fed funds rate to reach the range of 3.5%-3.75% by the middle of next year.