Deutsche Bank predicts a significant economic slump.
NEW YORK: Deutsche Bank made news earlier this month when it became the first significant bank to predict a US recession, albeit a “mild” one.
As a result of the Federal Reserve’s attempts to control stubbornly high inflation, it now predicts a deeper fall. Deutsche Bank researchers projected a major recession in a message to clients on Tuesday.
The problem, according to the bank, is that while inflation is at an all-time high, it will take a “considerable time” to return to the Fed’s objective of 2%. That implies the Fed will raise interest rates so swiftly that the economy will suffer.
“We see it…as extremely plausible that the Fed will have to tap on the brakes much more severely, and a deep recession would be required to bring inflation to heel,” Deutsche Bank analysts said in a document titled “Why the impending recession will be worse than projected.”
Consumer prices increased by 8.5 percent in March, the fastest rate in 40 years. The labour market is still thriving, with Moody’s Analytics estimating that unemployment will soon hit its lowest level since the early 1950s.
To bolster its case, Deutsche Bank created an index that compares the disparity between the Federal Reserve’s stated inflation and unemployment objectives over the previous 60 years. The Fed is today “far further behind the curve” than it was in the early 1980s, when unusually strong inflation forced the central bank to raise interest rates to record highs, devastating the economy.
The Fed, according to Deutsche Bank, has “never been able to rectify” even slight inflation and employment overshoots “without sending the economy into a major recession.”
The labour market is “over-tightened,” according to the bank, and “something tougher than a moderate recession will be required to accomplish the job.” by up to two percentage points in unemployment
The good news is that when the Fed abandons its anti-inflationary tactics, the economy will rebound by mid-2024, according to Deutsche Bank.
Of course, no one can predict how this will play out. Although Deutsche Bank is the most gloomy of the major Wall Street banks, some say the doom and gloom is overblown.
Goldman Sachs admits that reducing excessive inflation and wage growth would be “extremely difficult,” but adds that a recession is “not unavoidable.”
“We don’t need a recession, but we probably do need growth to fall to a little slower-than-potential rate, which elevates the likelihood of a recession,” Goldman Sachs analysts said in a research Friday evening.
Despite the Fed’s shift to inflation-fighting mode, UBS remains positive about the economy’s prospects.
In a study released on Monday, Mark Haefele, chief investment officer at UBS Global Wealth Management, stated, “Inflation should ease from current levels, and we do not expect a recession from rising interest rates,”
The chance that inflation will continue “persistently elevated for longer than generally anticipated.” according to Deutsche Bank, is the most crucial driver for its more pessimistic outlook.
According to the bank, several factors will lead to higher-than-expected inflation, including globalisation reversal, climate change, more supply-chain disruptions caused by the Ukraine crisis and China’s Covid lockdowns, and increased inflation expectations, which will boost real inflation.
“The plague of inflation has returned and is here to stay,” according to Deutsche Bank.
If inflation continues to climb, the Fed will be forced to contemplate more aggressive interest rate increases. The Federal Reserve raised interest rates by a quarter-point in March, and Chairman Jerome Powell said last week that a half-point increase is “on the table” at the upcoming meeting.
“It is quite tempting to take a cautious approach in the hope that the US economy may be gently landed on a sustainable course.” This is not going to happen,” Deutsche Bank stated. “In our opinion, the only way to limit the economic, financial, and societal damage of prolonged inflation is to do too much.”