The U.S. dodged a recession in 2023, but one could still happen this year, according to RBC Global Asset Management.

A recession may be coupled with a weakening dollar during the next few months, RBC said in releasing two new reports: the 2024 Global Investment Outlook and the Emerging Markets Equities Outlook.

Although markets have rebounded, “the economy will likely slow through the first half of 2024 before recovering later in the year,” the RBC Global Asset Management Committee said in the report. In part, the slowdown could happen because savings that were built up during the pandemic are being depleted, government spending is set to slow and geopolitical frictions are intense.

“Inflation has fallen sharply from its multi-decade peak in the middle of 2022, and we see further scope for decline [because] the four original drivers of the inflation spike have all turned meaningfully. The commodity shock has faded, supply-chain bottlenecks have eased, central banks have pivoted from massive ease to restraint, and fiscal stimulus is significantly diminished,” the Global Asset Management Committee said.

Housing costs, which are “the biggest remaining inflation driver, are likely to soften, in part because home prices are forecast to decline and because the shelter component of CPI has lagged in a way that should capture weakness over the coming months. For all these reasons, we think that inflation can continue moving back toward the central bank’s 2% target,” the committee said.

“The main headwind to the global economy, though, is that interest rates surged to their highest level in 16 years by mid- 2023 and, if they remain elevated, higher borrowing costs could discourage business and consumer spending while making debt-servicing more difficult,” the committee said.

The Federal Reserve Board probably will cease monetary tightening, but the threat of recession in early 2024 remains as the full force of prior rate hikes feeds through the economic cycle, RBC said. “The next cycle is moving into view [and] we believe that capital markets are transitioning to reflect a return to optimal inflation and firming growth later in the year,” RBC added.

At the same time, the global economy is not out of the woods yet because global trade is contracting, business expectations are soft, housing activity has plummeted and the labor market is starting to slowly lose momentum, according to the investment report.

The Fed may even begin to reverse policies and reduce interest rates this year, the investment report said.

“Further rate increases are not impossible if inflation were to be sustained at levels above 3%, [but] the data increasingly tilts toward rate cuts in 2024—likely sooner rather than later, and more cuts rather than fewer,” the RBC Global Asset Management Committee said. “Policy rates are now restrictive, and they are unlikely to be maintained at current levels if the economy enters a downturn or inflation remains on its current path.”

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