Goldman has cut its US recession probabilities.
1. We have cut our judgmental probability that the US economy will enter a recession in the next 12 months back to 25%, undoing our upward revision to 35% shortly after the SVB failure.
There are two reasons for this change. First, the tail risk of a disruptive debt ceiling fight has disappeared. The bipartisan budget agreement to suspend the debt limit will result in only small spending cuts that should leave the overall fiscal impulse broadly neutral in the next two years.
Second, and more importantly, we have become more confident in our baseline estimate that the banking stress will subtract only a modest 0.4pp from real GDP growth this year, as regional bank stock prices have stabilized, deposit outflows have slowed, lending volumes have held up, and lending surveys point to only limited tightening ahead.
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