While the Fed’s Wednesday report gave higher forecasts for economic growth in the remainder of 2023, it still left its predictions for the further future almost untouched. Economists have been divided on the question of the US economy’s path, given its unusual characteristics of high inflation and low unemployment, but for Deutsche Bank, one of the world’s largest financial entities, there’s no question: the US is destined for recession.
“The US is heading for its first genuine policy-led boom-bust cycle in at least four decades,” said David Folkerts-Landau, the chief economist of Deutsche Bank, in a report ominously titled “The Clock is Ticking.”
“The inflation we see was induced largely by expansive fiscal and monetary policy, and the aggressive rate hikes needed to tame that have now materialized. Avoiding a hard landing would be historically unprecedented.”
According to the bank, a “moderate recession” is expected to hit by early 2024, leading to an economic contraction of 0.4% that year.
More immediately, Deutsche expects the Federal Reserve to resume its rate hikes next month after declining to do so earlier this week.
“While some progress has been made on bringing the labor market into better balance and reducing inflation, both remain far from the Fed’s objectives,” it said, joining a position widely held by other economists.
By October 2023, Deutsche predicts consumer spending will have noticeably slowed as excess savings dry up, and by the end of the year it expects unemployment to rise above 4% from its current rate of 3.7%. In early 2024, it expects the jobless rate to reach 4.5%.
After the recession hits, Deutsche is predicting the Fed will rapidly cut interest rates with the same intensity with which it raised them, beginning in March 2024.
However, things could turn out even worse if the conflict in Ukraine further intensifies or if a conflict breaks out between the US and China in the coming months.
“Another risk is a strong El Niño event leading to fresh inflationary pressures from higher food prices,” the bank report said.
That said, Deutsche said that investment in artificial intelligence could become a major economic driver in the coming years, but that it would take a few years for that technology to mature enough to be of economic benefit.
“Given a poor cyclical outlook, low productivity, and declining demographics, we are in desperate need of a new source of growth,” it said.