An American top economist has raised concerns that the debt-driven U.S. economy will face a hard landing in 2025.
On Monday, May 13, Torsten Slok, Chief Economist at Apollo Global Management, told Bloomberg that he expects the U.S. economy to strengthen in the second half of the year due to stubborn inflation, making it difficult for the Federal Reserve to adjust its monetary policy.
Slok believes that the Fed will not cut interest rates in 2024 because only a significant slowdown in economic growth by the Fed can quickly achieve the 2% inflation target.
He also predicts that with the ongoing impact of fiscal spending in the coming quarters, corporate profits are expected to continue performing well.
However, all costs will be deferred to the future.
Slok says the economy will remain stable in the next few quarters, but the growth momentum could turn into headwinds as early as 2025.
He mentions that despite low unemployment rates, delinquency rates on credit cards and auto loans are rising, and even though there is a current sense of a “good economy,” office properties and other commercial real estate sectors have not shown improvement.
Commercial real estate has been a widespread concern as the Fed continues to raise interest rates. The interest rate hikes have led to soaring borrowing costs in the real estate industry. Many fear that if rates do not decrease soon, it could trigger a wave of debt defaults.
Office properties have been a particular pain point, not only severely impacted by remote work post-COVID, but also facing issues of declining value.
A recent report by Fitch Ratings indicated that in April, office loans accounted for 54% in the 60+ delinquency rate index.
The 60+ delinquency rate is a mortgage loan indicator commonly used in the real estate industry to measure the percentage of mortgage loans with delayed payments exceeding 60 days in a specified period, such as a year.
Slok also observes that economic growth has not led to the disappearance of highly leveraged companies; instead, they exist across various industries.
He believes that the current strong momentum in the U.S. economy stems from high levels of consumer and corporate debt burdens. Ultimately, these trends are expected to start shaking and lead to a hard landing in 2025.
“We still have a very strong momentum. This comes from the loose financial environment,” he said. “Aside from that, we also have the drive from fiscal spending. We still have strong expenditures from the Chip Act, the Inflation Reduction Act, and the Infrastructure Act.”
However, after the weakening effects of fiscal policies, what may lie ahead could be unemployment and economic slowdown. He said, “Imagine what it would look like if the unemployment rate eventually rises.”
“The sensitivity next year is that we may actually face the risk of a hard landing,” he added.
The industry is generally cautious about the outlook for 2025 and believes that the deteriorating conditions in the U.S. labor market are evidence that an economic downturn is imminent.