abrdn Senior Economist: Using Economic Conditions to Cut Spending

“Our assessment of the economic outlook is not very optimistic. We expect a US-led recession in the developed world to hit the global economy by 2024. Fiscal stimulus at this point in the cycle could be counterproductive.

The labor markets are overheating in the US and the UK, resulting in very strong wage growth. While it is true that wage growth has not yet explained most of the rise in inflation, the current strength of wage growth means that it is very difficult to see how inflation can return to target from here without a recession. So slackness, however painful, seems necessary. Loose fiscal policy will only increase inflationary pressures in the economy, leading to further hikes in interest rates and ultimately a more painful recession.

At this week’s Fed meeting, we expect a “hold” announcement. This will be the first time since March 2022 that interest rates will not be raised at a policy meeting as the Fed nears the end of its raising cycle. However, the Fed is likely to stress that the suspension is not the same as a pause. A pause refers to an extended period of policy change. In fact, the Fed’s forecasts say there will be another rate hike this year. We expect this additional hike to come in July, but a September hike is also possible if the Fed wants more information on how the economy handles the previous tightening.

The next rate hike will likely be the last in this cycle as the effect of previous monetary tightening is finally starting to take hold in the economy, leading to a sustained economic slowdown in the second half of the year. The Fed will not be talking about a definitive easing cycle for now. But we believe interest rates will be cut significantly over the next year once underlying inflationary pressures ease.”

By Luke Bartholomew, Chief Economist at ABRDN

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