It’s possible that the year’s first half’s negative economic growth is just a foreshadowing of a much more severe downturn that might persist until 2024.
The United States needs a “miracle” to escape a recession, according to Stephen Roach, the former chief of Morgan Stanley Asia.
“We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” on Monday, Roach spoke with “Fast Money” on CNBC. “They haven’t kicked in at all right now.”
Roach, a senior professor at Yale University and a former economist for the Federal Reserve, contends that Fed Chair Jerome Powell has no choice but to tighten monetary policy in the manner of Paul Volcker. Early in the 1980s, Volcker aggressively increased interest rates in an effort to rein in spiraling inflation.
“Go back to the type of pain Paul Volcker had to impose on the U.S. economy to ring out inflation. He had to take the unemployment rate above 10%,” said Roach. “The only way we’re not going to get there is if the Fed under Jerome Powell sticks to his word, stays focused on discipline, and gets that real Federal funds rate into the restrictive zone. And, the restrictive zone is a long ways away from where we are right now.”
The unemployment rate is 3.5% despite the Fed’s aggressive trajectory of interest rate increases. The level is equal to the lowest since 1969. That might alter on Friday when the Bureau of Labor Statistics publishes its report for the month of August. The rate will eventually start to increase, according to Roach.
“The fact that it hasn’t happened and the Fed has done a significant monetary tightening to date shows you how much work they have to do,” he noted. “The unemployment rate has got to go probably above 5%, hopefully not a whole lot higher than that. But it could go to 6%.”
Consumers might be the decisive turning point. Roach predicts that because of the ongoing inflation, they will eventually submit. Once they do, he forecasts that the reduction in expenditure will have an impact on the entire economy and hurt the labor market.
“We’re going to have to have a cumulative drop in the economy [GDP] somewhere of around 1.5% to 2%. And, the unemployment rate is going to have to go up by 1 to 2 percentage points in a minimum,” said Roach. “That would be a garden variety recession.”
The outlook is not much better internationally.
He anticipates that a recession will also hit the world economy. China’s zero-Covid policy, significant supply chain backlogs, and tensions with the West are some of the reasons why he does not believe the country’s economic activities would mitigate the effect.
In his forthcoming book “Accidental Conflict: America, China and the Clash of False Narratives,” which is scheduled to be released in November, Roach discusses his concerns on the U.S. and China relationship.
“In the last five years, we’ve gone from a trade war to a tech war to now a cold war,” Roach said. “When you’re in this trajectory of esclating conflict as we have been, it doesn’t take much of spark to turn it into something far more severe.”