JP Morgan and Goldman Sachs expect recession in US and Europe

Wall Street bank chiefs say sharp rise in interest rates and embedded inflation are weakening economic outlook

Attendees take part in the annual Future Investment Initiative (FII) conference in the Saudi capital Riyadh. AFP

Wall Street's top banks expect a looming recession in the US and Europe as interest rates continue to rise sharply and the economic outlook weakens amid persistent geopolitical headwinds.

JP Morgan Chase chief executive, Jamie Dimon, and his counterpart at Goldman Sachs, David Solomon, believe the likelihood of a recession in the world’s biggest economy is increasing as the US Federal Reserve continues to increase its policy rate aggressively.

“There is no question that economic conditions, in my opinion, are going to tighten meaningfully from here,” Mr Solomon said at a panel discussion at the Future Investment Initiative conference in Riyadh on Tuesday

In the US, particularly in the last week or two, there has been a clear message from the Fed that it will continue on the current path of pushing policy rates to 4.5 per cent, with three-quarters of a percentage point rate increases, he said.

The Fed will then pause because there is a lag effect of these rate increases, and it will continue on the path “if they don't see real changes”.

“I think generally when you find yourself in an economic scenario like this, where inflation is embedded, it's very hard to get out of it without economic slowdown,” Mr Solomon said.

“We will likely have a recession in the US [and] going to have I think most likely a recession in Europe.”

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Saudi Arabia's Future Investment Initiative 2022 - in pictures

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Goldman Sachs estimates the risk of a US recession in the next year at 35 per cent while Bloomberg analysts forecast 100 per cent. The Fed meets next week and is expected to raise interest rates by 75 basis points for a fourth consecutive time as it vies to tame four-decade high inflation.

Annual headline inflation in the US was up 8.2 per cent in September, down from its peak of about 9 per cent in June but still near the highest levels since the early 1980s, the latest economic data indicates. Core inflation for the month was up 6.6 per cent from a year ago, the biggest 12-month gain since August 1982.

Mr Dimon said the world would know in six months if recession fears materialise, however, the bigger concern for him was geopolitical headwinds.

“The most important thing is the geopolitics around Russia and Ukraine, America and China, relationships of the western world,” Mr Dimon told delegates during a panel discussion.

“That to me would be far more concerning than whether there’s a mild or slightly severe recession.”

The session was attended by Yasir Al Rumayyan, governor of the kingdom’s Public Investment Fund, Khaldoon Al Mubarak, Mubadala Investment Company managing director and chief executive, Ray Dalio, founder of Bridgewater Associates, Catherine MacGregor, chief executive of Italian energy company ENGIE and Stephen Schwarzman, chairman of Blackstone Group.

The FII, in its sixth attrition this year, comes amid the weakening global economic outlook, surging inflation, the war in Ukraine and elevated energy prices.

Opec+ this month took the decision to cut oil output by two million barrels per day to stabilise oil markets, a decision criticised by the US administration. Oil producers have rallied behind Saudi Arabia, which along with Russia leads the super group of crude producers, after ire from Washington over the decision to cap production.

Mr Dimon, however, said the two nations had been allies for the more than 75 years, and they would work out their differences, but media hype did not help.

“I can’t imagine any allies agreeing on everything and not having problems,” Mr Dimon said. “They will work it through and I’m comfortable folks on both sides are working through this.”