‘Recession is inevitable’: Summers

Leading US economist, Larry Summers, has stated recession is inevitable and central banks will find it harder to respond.

Speaking at the Citi Investment Conference in Sydney, Summers, who was a former Secretary of the Treasury and director of the National Economic Council, said he believed unemployment figures and high debt levels, among others, pointed to an upcoming recession.

“It’s my judgement that a recession is almost inevitable concomitant of a path in which we achieve substantial disinflation.”

He said this upcoming recession would be harder for central banks to respond to than previous recessions.

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“Because of the very high initial levels of debt and the fact that we appear to be heading into a somewhat higher real interest rate environment than we were in previously, I would say it’s going to be more difficult to respond to the next recession than it was to the last recession.

“I think there are likely to be tensions between central banks’ desire to maintain stability and central banks’ need to be vigorous in pursuing anti-inflationary policy. That’s going to be one of the challenges for central banks to navigate going forward.”

Regarding interest rates, he said he expected rates in the US would rise higher than the Federal Reserve dot plot was indicating.

“The central bank has been clear that its primary focus for the foreseeable future is to bring down inflation substantially and that it is prepared to do whatever is necessary to achieve that objective. It has signaled an intention to raise rates to 4.5% plus range.

“My best guess is that if we’re going to down inflation sufficiently, rates are going to have to provide somewhat more than is priced into the market or what’s reflected in the Fed’s dot plot.

“But that’s a guess, not a comfortable judgement, and unlike my view ago, I think the Fed has its eyes in the right range.”