NEW YORK–The combination of ongoing inflation and the Federal Reserve’s pledge to keep raising rates until it is able to bring inflation under control will drive the American economy into a 1990-style mild recession starting in the Spring of early 2023, according to Fitch Ratings.
In a new report obtained by CNN, Fitch has cut its U.S. growth forecasts for this year and next, citing the Fed increases as the primary reason. The report notes U.S. GDP is now expected to grow by just 0.5% next year, down from 1.5% in the firm’s June forecast.
High inflation will “prove too much of a drain” on household income next year, Fitch said, according to the CNN report, which forecasts shrinking consumer spending to the point that it causes a downturn during the second quarter of 2023.
A Silver Lining
The silver lining, however, is that the next recession may not be nearly as destructive as the last two major ones, said CNN in its analysis.
“The U.S. recession we expect is quite mild,” economists at Fitch Ratings said.
The credit ratings firm argued that the United States enters this difficult period from a position of strength — especially because consumers are not saddled with quite as much debt as in the past, CNN explained.
“U.S. household finances are much stronger now than in 2008, the banking system is healthier and there is little evidence of overbuilding in the housing market,” Fitch Ratings economists wrote.
Fitch Ratings is predicting the unemployment rate will rise to 5.2% from 3.5% in 2024. That translates to the loss of millions of jobs, but not nearly as many as those lost during the prior two recessions.
Similar to 1990 Recession
In addition, Fitch says the next recession will likely be “broadly similar” to the one that started in July 1990 and ended in March 1991.
“There are intriguing similarities between today and the early 1990s,” CNN stated. “Much like today, the 1990 recession occurred after the Fed scrambled to fight inflation by rapidly raising interest rates. Likewise, that downturn was preceded by a war-fueled oil shock. Back then, it was Iraq’s invasion of Kuwait that drove up gasoline and energy prices for Americans.
Today’s period of high energy prices is linked in large part to Russia’s invasion of Ukraine, a conflict that has also raised food prices.”