Quarterly Outlook: Inflation Eases, Recession Risk Falls

Main Takeaway

Although risks remain, the economy has successfully navigated the path toward lower inﬂation without triggering a recession. Fiscal spending and the expectation that the Federal Reserve will cut interest rates have buoyed the American economy. Rates will likely stay higher for longer than anticipated at the start of the year, which continues to squeeze certain sectors. Inﬂation continues to stabilize in developed countries, and the likelihood of a global recession has declined.

Top Risks

Although ﬁscal policies have boosted economic growth, policymakers seem unwilling to navigate back toward a balanced budget. With interest expenses continuing to grow, the debt-to-GDP ratio in the U.S. is on an unsustainable path. Consumer spending is weakening among younger and lower income households. Commercial real estate debt reﬁnancing threatens to undermine regional banks, while a trend toward domestic production threatens higher inﬂation.

Sources of Stability

Globally, inﬂation has subsided and the threat of a recession over the next 12 months is on par with a “normal” economy. Other central banks, such as Canada and Europe, have started to reduce their target interest rates. The Fed has indicated its next move will likely be a rate cut, giving businesses and consumers more conﬁdence to spend. Interest rates for businesses, measured by credit spreads, have fallen since the Fed’s change in messaging.

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook for Q3 2024.

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July 10, 2024