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Larry Summers Says Risk of 2022 Recession Climbing, May Damp Inflation

·2 min read

(Bloomberg) -- Former Treasury Secretary Lawrence Summers said that there’s an increasing risk the looming recession he’s anticipated will start sooner, in 2022, and that inflation may cool as a result.

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“The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “If the economy did go into recession in the next six to nine months, then you’d probably see a reduction in inflationary pressures.”

Data this week showed that consumers have been scaling back their purchases after enduring an ever-increasing climb in inflation over the past year. That’s seen economists mark down their estimates for the economy, with some cautioning that it’s possible gross domestic product might register a second straight drop for the second quarter.

Read More: Economists Sour on US Outlook After Spending Stumbles

The scenario of an economic downturn caused by a “self-fulfilling process coming out of the high inflation and reductions in people’s incomes” is looking more likely now, said Summers, a Harvard University professor and paid contributor to Bloomberg Television.

There’s perhaps a 50-50 chance -- “maybe it’s a bit less than that” -- that GDP shrank in both the first and second quarters of this year, Summers said. That would meet the textbook definition of a recession.

Summers has for months predicted that inflation -- which has been running at over 8%, the fastest in four decades -- would only come back down toward the Federal Reserve’s 2% target with an economic downturn. That could be caused either by Fed interest-rate hikes or by a weakening in the economy, he’s said.

If the US does enter a recession, that would likely prompt policy makers to moderate their tightening, Summers said.

“You’d see the Fed probably feel that it had to push rates up less” than if strong growth and pressure on wages continued, he said.

An increasing number of retailers, along with semiconductor firms, have been reporting declining demand and a build-up in inventories, Summers noted. That will lead to sales and to reduced production, he added.

Read More: Micron’s Warning on Cooling Demand Weighs on Global Chip Stocks

The former Treasury chief also indicated that, despite talk of deglobalization and the price pressures that such a trend may cause, he’s confident that central banks will ultimately get inflation rates back to their target.

The idea that “it’s not going to be possible for central banks to achieve low inflation and meet their inflation targets -- that would not be an idea that I would subscribe to. It may be more difficult, it may require them to be resolute, but I don’t think they’re going to be unable to meet their inflation targets,” he said.

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