Deutsche Bank predicts a U.S. recession in late 2023

[funkervogt]

The Federal Reserve's fight against inflation will spark a recession in the United States that begins late next year, Deutsche Bank warned on Tuesday.

The recession call -- the first from a major bank -- reflects growing concern that the Fed will hit the brakes on the economy so hard that it will inadvertently end the recovery that began just two years ago.

"We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession," Deutsche Bank economists led by Matthew Luzzetti wrote in the report.

That forecast is driven by red-hot inflation, with consumer prices rising at the fastest pace in 40 years. Hopes that inflation would rapidly cool off have been dashed, in part because of the war in Ukraine.

Inflationary pressures have broadened out, raising concern that the Fed will have to rapidly raise interest rates to get prices under control. Deutsche Bank pointed to how energy and food commodity prices have spiked since Russia invaded Ukraine.

"It is now clear that price stability...is likely to only be achieved through a restrictive monetary policy stance that meaningfully dents demand," the Deutsche Bank economists wrote.

...Although Deutsche Bank cautioned there is "considerable uncertainty" around the exact timing and size of the downturn, it's now calling for the US economy to shrink during the final quarter of next year and the first quarter of 2024, "consistent with a recession during that time."

The good news is Deutsche Bank is not forecasting a deep and painful recession like the past two downturns.

Rather, the bank expects a "mild recession," with unemployment peaking above 5% in 2024. That would still translate to considerable layoffs. During the Great Recession unemployment peaked at far higher levels of 14.7% in 2020 and 10% in 2009.

This coming recession would allow inflation to get back towards the Fed's target by the end of 2024, Deutsche Bank said.

"With the unemployment rate receding only slowly following the peak, inflation should continue to moderate, falling to the Fed's 2% objective in 2025," Deutsche Bank said.

https://www.cnn.com/2022/04/05/business ... index.html

[funkervogt]

Update: Deutsche Bank has upped the ante.

Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a "mild" one.

Now, it's warning of a deeper downturn caused by the Federal Reserve's quest to knock down stubbornly high inflation.
"We will get a major recession," Deutsche Bank economists wrote in a report to clients on Tuesday.
The problem, according to the bank, is that while inflation may be peaking, it will take a "long time" before it gets back down to the Fed's goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.
"We regard it...as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel," Deutsche Bank economists wrote in its report with the ominous title, "Why the coming recession will be worse than expected."

https://www.cnn.com/2022/04/26/economy/ ... index.html

[funkervogt]

Update: Deutsche Bank gets more pessimistic.

"More than two months ago we forecasted that the U.S. economy would tip into a recession by end-2023," Deutsche Bank Chief U.S. economist Matt Luzzetti wrote in a note to clients on Friday. "Since that time, the Fed has undertaken a more aggressive hiking path, financial conditions have tightened sharply and economic data are beginning to show clear signs of slowing. In response to these developments, we now expect an earlier and somewhat more severe recession."

Luzzetti now sees U.S. gross domestic product (GDP) growth coming in at "sub-1%" in the first half of 2023, followed by a -3.1% contraction in the third quarter of 2023 — one quarter earlier than Luzzetti previously estimated. In the fourth quarter of 2023, Luzzetti expects growth to contract by another -0.4%.

"The upshot is that the economy is likely to contract next year by about 0.5%," the note stated. "A more severe downturn leads to a higher unemployment rate, which peaks near 5.5%. The weaker labor market helps to guide inflation closer to target by 2024, though we still anticipate a nearly half percent overshoot at that point."

Luzzetti and team also see the Consumer Price Index (CPI) peaking at 9% in the third quarter of 2022. CPI, a closely watched measure of what Americans pay for goods and services, was up 8.6% year-over-year as of May — the most since 1981.

https://www.yahoo.com/finance/news/deut ... 28468.html

[caltrek]

What all these predictions seem to miss is that the Fed is raising interest rates in response to inflation, which in turn is caused by an overheated economy. So, the Fed can easily lower interest rates if the economy does dip into recession.

Sure, stagflation is a problem. One brough on by supply chain issues as much as anything. Supply chain issues have been brough on by Covid (which seems to be in remission), the war in Ukraine (which has also brought on higher oil prices that also benefit carbon-based fuel exporting industries in countries like the U.S. and has brought benefits to the arms industry), and higher food prices (brough on by war and more extreme weather events). Extreme weather events are hard to mitigate against and definitely need to be continuously monitored. In contrast, there are all sorts of alternative fuel and energy options coming on-line - all accelerated by higher oil prices. Collectively, I suspect they will bring energy prices down, although gas at the pumps may stay high, even as hybrids mean many are getting more miles per gallon. As usual, the poorest who cannot afford new electric and/or hybrid vehicles will be the most to suffer, as will countries where governments resist the notion of converting their government fleets to electric vehicles and hybrids.

So, from an economics and technology standpoint, I am pretty optimistic. From a political standpoint, I am very pessimistic. The success of disinformation campaigns continues to be a problem, as is the erosion of a commitment to one person one vote democratic processes. Again, initially this will be of great benefit to the rich and impact upon the poor the hardest. At least initially, as more authoritarian regimes will eventually encroach upon private sector initiative and discretion, so that virtually everybody will suffer. Universal suffering is best exemplified by global climate change and its associated dislocations.

Environmental mitigation efforts (increasing food production, flood control and drought response measures, conversion to renewable energy sources, etc.) and increased defense spending will all continue to push the need for a full employment economy. This, despite countervailing efforts toward technological replacement of the work force. So, a lot depends upon individual policy choices made by local elites.

[funkervogt]

Another update: Deutsche Bank now thinks the U.S. recession might start by January 2023.

Something big shifted in the market following Wednesday’s U.S. consumer-price index report, according to George Saravelos, global head of currency research at Deutsche Bank.

Based on moves in U.S. stocks SPX, -0.30% and the U.S. dollar EURUSD, 0.45% which finally achieved parity with the euro on Thursday, Saravelos said in a note to clients on Thursday that futures markets are now pricing in 100% odds that the U.S. economy will slide into a recession before the end of the year.

Using the peak in the Fed funds futures curve as a proxy for recession expectations, Saravelos pointed out that the market’s views on the timing of the start of the next recession have shifted substantially since February, when investors were bracing for a recession to arrive in December 2024. As of Thursday, futures traders were bracing for a recession to start in January 2023.

https://www.marketwatch.com/story/marke ... 1657826565