A recession just isn’t in the cards, BofA says.
Instead, get ready for ‘extended weakness’
BY
WILL DANIEL
May 27,
2022 9:14 PM GMT+2
From
billionaire investors to former Federal Reserve officials, recession
predictions have flooded in since the start of the year. But despite the
persistent headlines, many on Wall Street aren’t buying it.
Bank of
America research economists say consumers shouldn’t expect a recession in 2022;
instead, they should prepare for a growth slowdown.
Why? BofA
says it’s good news that the major shocks to the global economy that have hit
this year weren’t “synchronized,” namely, the war in Ukraine, supply-chain
issues, China's COVID-19 lockdowns, and central bank interest rate increases.
The
investment bank’s team, led by the head of North America economics Ethan
Harris, argued in a Friday research note that the drag from China’s COVID-19
lockdowns will be short-lived; supply-chain problems are “past their peak”; the
energy crisis caused by the war in Ukraine is mostly behind us; and central
bank tightening will be “more of a problem next year.”
“In sum,
there are a number of risks to growth across the world, but if the shocks are
not synchronized then they are more likely to create an extended period of
global weakness rather than a concentrated recession,” the economists wrote.
Harris and
his team see U.S. GDP growth falling to 2.6% this year and 1.5% in 2023, but
argue inflation will moderate from current levels and the economic slowdown
will largely be a result of the Federal Reserve raising interest rates. That
means it will be easier to reverse if a recession rears its head.
“It is
easier for central banks to manage slowdowns if they are the cause of the
slowdown,” they noted.
The
economists also took the opportunity to hit back at ultra-bearish recession
predictions on Wall Street.
“The nasty
selloff in the equity market seems to have brought the perma-bears out of
hibernation. By some accounts, only two outcomes are plausible: mild or major
recession,” they wrote. “Our base case remains an extended period of weak
growth, and we think any recession is likely to be mild.”
A retail
slowdown, not a collapse
In a
separate research note, the same team of economists broke down why they believe
the recent earnings misses from retailers like Walmart and Target, which shook
Wall Street last week, don’t indicate an impending economic downturn.
They argue
that investors should be cautious diving into retail firms’ stocks because
“pricing power will shift from firms to workers” over the coming year as
consumer spending moves from being goods-focused to services-focused.
The change
in spending patterns will make it harder for retailers to pass on rising costs,
the economists say, but a slowdown in earnings doesn’t mean the economy will
fall into a recession.
“The
weakness in retail earnings seems more a confirmation of macro trends than a
signal of serious trouble for the overall economy,” the Bank of America team
wrote.
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