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WEF survey shows economists evenly split between U.S. recession and growth, which should support gold prices

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(Kitco News) - The latest report from the World Economic Forum shows that the global economic outlook has improved since the start of the year. There is no clear consensus on the growth trajectory however, with recession fears still prevalent among divergent views.

In its Chief Economists Outlook for May, the WEF said that 45% of survey participants said a recession is likely, while another 45% consider it unlikely.

"While there are signs of nascent optimism, the banking disruption of March 2023 has caused tremors in the global outlook," the report said. "Moreover, the marked dispersion of responses to some questions in the latest Chief Economists Survey suggests that there is little consensus about how to interpret and weigh the latest economic data and developments."

Chief economists are also equally split on regional inflation outlooks; however, there are growing concerns that rising consumer prices are becoming embedded in the broader economy.

"Headline rates have begun to ease, but core inflation is stickier than anticipated and shows signs of picking up. The pressure on many households remains acute, and more than three-quarters of respondents expect the cost of living to stay at crisis levels in numerous countries throughout 2023," the analysts said.

Adding to the uncertainty in global markets is the ongoing banking crisis, with First Republic Bank the latest domino to fall last week. The report noted that 80% of economists said central banks face a difficult dilemma as they try to manage the inflation threat while maintaining financial sector stability.

In this environment, economists believe that central banks will struggle to reach their inflation target.

Although weakness in the U.S. regional banking sector is creating a challenging environment, the report said that economists do not see this as a sign of systemic vulnerability.

Looking at regional growth, economists are the most optimistic about China as activity continues to expand after the nation lifted its strict COVID-19 policies late last year.

On the other end of the spectrum, economists are the most pessimistic about Europe's economy with 75% of those surveyed saying they see weak growth for the eurozone. The economic outlook is split roughly down the middle for the U.S. economy.

The WEF outlook comes ahead of the Federal Reserve's heavily anticipated interest rate decision. Markets have all but fully priced in a 25-basis point hike Wednesday afternoon. However, for some market analysts, any forward guidance from the central bank will be key.

Gold stuck at $2,000, caught between high inflation and recession fears

Markets expect May to be the last rate hike in this tightening cycle and see a potential rate cut as early as September.

Analysts note that this environment of significant economic uncertainty will remain fairly positive for gold even if market volatility does pick up on fluid Fed rate hike expectations.

Some market analysts noted that with so much uncertainty, the gold market should be able to hold support between $2,000 and $1,980 an ounce, even with a hawkish Fed.

In a report Wednesday, Thu Lan Nguyen, head of commodity research at Commerzbank, said that gold prices could weaken if the Federal Reserve strikes a hawkish tone, forcing markets to adjust their expectations and driving bond yields higher.

"That said, it is by no means certain that the Fed will be able to convince the market of its hawkish stance," Nguyen said. "It is equally conceivable that the market will regard any further rate hikes as a mistake that could exacerbate a potential recession in the US and force the Fed to implement an even more pronounced interest rate U-turn at a later date. This could then offset any negative impact of the rate hikes on the gold price."

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