Citigroup Expects the US to Fall Into a Recession in the Fourth Quarter

A view of the exterior of the Citibank corporate headquarters in New York, on May 20, 2015. Mike Segar/Reuters

Citigroup said it believes the United States likely will fall into a “shallow” recession in the fourth quarter of this year due to multiple “uncertainties” in the economy amid continued inflation, rising interest rates, and the recent banking turmoil.

Jane Fraser, the CEO of the investment bank, made the comments during an earnings call on April 14. Citigroup had earlier said it expected a U.S. recession in the third quarter of 2023.

Fraser noted that there is currently a degree of uncertainty regarding the economy, particularly in light of the recent collapse of Silicon Valley Bank, which was the sixteenth-largest bank in the United States.

However, she insisted that while a “small handful of institutions” are still facing challenges, the U.S. financial system as a whole remains strong and “unmatched globally.”

The CEO also pointed to the Federal Reserve continuing with its interest-rate hikes to battle inflation, which she said has “been more than stubborn in services even as we see signs of cooling in labor and manufacturing.”

“We believe it’s now more likely that the U.S. will enter into a shallow recession later this year. That could be exacerbated in depth and duration in a more severe credit crunch,” Fraser said. “But right now, the biggest unknown is the impact on terminal short-term U.S. interest rates and of course, how the debt ceiling plays out.”

The U.S. reached its technical debt limit of $31.4 trillion on Jan. 19, and the Treasury Department started taking so-called extraordinary measures to prevent a default, according to Treasury Secretary Janet Yellen.

Despite the growing risk of a possible default, Washington is currently in a deadlock over the debt ceiling as the United States inches closer to a possible first-ever default on its debt obligations, an outcome that many market experts have warned could have a disastrous impact on the economy.

Republicans to Vote on Debt Ceiling Bill

House Speaker Kevin McCarthy (R-Calif.) said Monday during a speech at the New York Stock Exchange that his lower chamber will vote on a bill to lift the nation’s debt ceiling “in the coming weeks” in exchange for cutting government spending, which Republicans argue has contributed to red-hot inflation.

McCarthy, who has criticized President Joe Biden for refusing to negotiate with Republicans about the exchange, said that the GOP bill will raise the debt ceiling for a year, return the federal government spending to fiscal year 2022 levels, and then limit the growth of spending over the next 10 years to 1 percent annual growth.

This, he said, will “save taxpayers trillions of dollars, make us less dependent on China, and curb high inflation—all without touching Social Security or Medicare.”

Biden has said negotiations over spending cuts will only go ahead after the debt limit is raised.

Despite the warning of a looming recession, Citigroup on Wednesday raised its global economic growth forecast for this year to 2.4 percent, from the 2.2 percent expected earlier, citing “solid” performance in the United States, eurozone, and China.

“Our outlook envisions that the acute financial stresses, which last month triggered pressures on both sides of the Atlantic, will continue to recede,” Citigroup economists, led by Nathan Sheets, said in a note.

Economists, however, cut their global economic growth forecast for 2024 to 2.1 percent, down from the 2.5 percent previously forecast.

“While the acute phase of the banking tensions appears to be abating, we continue to see chronic challenges associated with higher interest rates and, more broadly, the implications of this episode for bank assets, deposits and funding, and bank margins,” said Sheets.

Reuters contributed to this report.