(Bloomberg) -- Former Treasury Secretary Lawrence Summers predicted that the consensus among economists will increasingly fall in line with the U.S. tipping into a recession next year.
“The combination of overheating, followed by policy delay followed by supply shocks means I think it's a very difficult set of challenges, and recession in the next couple of years is clearly more likely than not,” Summers told Bloomberg Television's “Wall Street Week” with David Westin on Friday. “I suspect that's how the consensus will evolve.”
The latest monthly survey of economists by Bloomberg showed the chance of a recession over the coming 12 months increased to 27.5% from 20% in March. Summers also highlighted that the U.S. has never experienced inflation above 4% and unemployment below 4% without that being followed by an economic slump within two years. Last month, consumer prices are estimated to have surged more than 8%, while the jobless rate was 3.6%.
Rising prospects for a downturn could bolster Republicans -- who have blamed soaring inflation on President Joe Biden's $1.9 trillion pandemic-relief package -- as they aim to win control of at least one chamber of Congress in mid-term elections in November.
Pocketbook concerns have also featured prominently in France's presidential election campaign, with the first round of voting on Sunday. Nationalist candidate Marine Le Pen has jumped in the polls as she tries to unseat pro-European centrist Emmanuel Macron.
‘Nervous' on France
“We need to be nervous” about the French election, Summers said. A Le Pen win looks “at least as plausible now as Donald Trump's election did a bit before the U.S. election or as Brexit did a bit before the British” vote, he said, while still anticipating a Macron win as the base case.
In the U.S., decades-high inflation means that average real wages are experiencing “one of their worst performances over the last year that we have seen,” said Summers, a paid contributor to Bloomberg TV and a Harvard University professor.
That's despite nominal wages -- unadjusted for living costs -- climbing at an historically fast pace, at an annual 5.6% in March. Summers recently co-wrote a research paper showing that, once nominal wages start rising above a certain pace -- “perhaps 4% perhaps 4.5%,” he said -- that's associated with worse outcomes, not better, for households' purchasing power.
The paper underscores Summers's argument that the Federal Reserve will need to weaken the job market as it battles to bring inflation down. Its projections suggest a sunnier scenario of price pressures receding while the unemployment rate remains relatively low.
China Worries
Turning to China, the former Treasury chief and White House National Economic Council director said that the latest news on lockdowns affecting the metropolis of Shanghai showcases concerns about the world's second-largest economy.
“Between exit from Covid, profound financial strains, internal issues around inequality, tension over state enterprises, China has real economic vulnerabilities,” Summers said. “What I'm fearful of is that those vulnerabilities will translate into hostile nationalist impulses as a way of holding the country together when the glue of rapidly growing prosperity starts to peel and flake off.”
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