As the global economy continues to grapple with the ongoing banking crisis and the "stickiness" of inflation, there is increasing uncertainty about what lies ahead. Jake Jolly, head of investment analysis at BNY Mellon Investment Management, has outlined three potential scenarios, each with its own set of risks and probabilities.
Jolly and his team have used a combination of subjective views, quantitative and qualitative market analysis, and historical perspective to develop three possible scenarios for the economy. The first scenario, which has a 50% probability, is called the "credit crunch." It posits that the Federal Reserve will continue to hike interest rates, causing credit conditions to tighten significantly. This, in turn, would lead to a recession in the United States during the second half of 2023, with Europe and the UK feeling the impact even earlier.
The second scenario, with a 30% probability, is called the "delayed landing." This scenario assumes that global central banks will pause their rate hikes in response to the banking crisis. Labor markets will remain tight, and wage growth will accelerate, leading to inflationary pressures. As inflation increases, central banks will be forced to hike rates even further, leading to a recession in the United States in the second half of 2024.
The third and least likely scenario, with a 20% probability, is the "soft landing." In this scenario, inflation continues to fall without much need for Fed tightening, and interest rates peak at 5%. Job loss is minimal as wage growth decelerates alongside inflation. China's reopening has positive spillover effects and is, on balance, disinflationary for core goods.
The pandemic has given rise to the gig economy, with the share of Bank of America customers receiving income from gig-type jobs growing three times higher during the pandemic. However, this trend seems to be reversing, with gig-type income through direct deposits or debit cards slipping to 2.7% in February 2023, down from a high of 3.3% in March 2022. The decline may be due to lower demand, such as fewer restaurant takeout orders and grocery deliveries as the economy reopens. Alternatively, it could be a supply-side issue, with gig workers moving into full-time jobs as wage growth in the service industry increases.
Despite the challenges facing the economy, Jamie Dimon, CEO of JPMorgan Chase, believes that the failure of First Republic Bank does not increase the chance of recession. While he warns of "storm clouds" on the horizon, he believes that the banking system is "very stable" for now.