Rising credit card debt, higher rates, and housing correction will tip the US economy into recession and the Federal Reserve’s economic forecasts are simply not achievable, says UBS’s chief US economist.
Just as investors cheered a much-desired slowdown in US inflation, rising credit card debt, falling house prices, and higher borrowing costs yet to be fully felt will bring the US economy to a hard halt and force the Federal Reserve to reverse its monetary policy course this year., i.e. a desired slowing in the economy, but admitted there was a risk of a contraction.
“Trying to have an increase in the unemployment rate and inflation fall and do so painlessly, I think it’s impossible.”UBS is calling a hard economic landing, forecasting a contraction by Easter this year. It expects real GDP to drop 0.9 per cent by the end of the year before rebounding in 2024 to reach 2.9 per cent in 2025.
On top of those tensions, there is an acute correction in house prices with rents starting to fall and slowing activity in construction. The central bank raised rates by 0.75 of a percentage point four times last year, before slowing to a 0.5 percentage point increase in December. Its policy benchmark currently stands at a mid-point of 4.37 per cent.Fed officials have pencilled in a rate peak of 5.1 per cent, where it is likely to stay for an extended period, but financial markets expect fewer interest rate increases for a top of 4.9 per cent.
Last week, data showed US consumer prices unexpectedly fell for the first time in more than 2-1/2 years in December,The consumer price index dipped 0.1 per cent last month after gaining 0.1 per cent in November. That was the first decline in the CPI since May 2020, when the economy was reeling from the first wave of COVID-19 infections.
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