It appears as if U.S. economists may have popped the Champagne corks on a soft landing too early—at least according to Deutsche Bank.
The German multinational bank’s top research team believes Washington has sparked a boom-bust cycle that now is nearing its end stage. In its house view, the recession slated to arrive as soon as October is the inevitable consequence of a series of aggressive rate hikes designed to extinguish the very flames of inflation that policymakers ignited through their own actions during the COVID pandemic.
“Avoiding a hard landing would be historically unprecedented,” warned group chief economist David Folkerts-Landau in a research report titled The Clock Is Ticking, published on Wednesday.
This bleak view contrasts with recent investor bullishness as well as the belief that the Federal Reserve has seemingly pulled off the impossible by cooling an overheated economy without sparking a recession, leaving only deflated asset prices as collateral damage—a “non-recession recession” as private equity firm Apollo Global Management called it last month.
Germany’s only bulge bracket bank uses an indicator that attempts to measure the probability of a recession in the next 12 months. Currently it is handicapping the chances of a contraction in U.S. economic activity “near 100%”—in other words, a virtual certainty. But in order for this to occur, one thing has to happen first: Consumers must exhaust the last of their savings stored up from COVID lockdowns.
“These will not be depleted until nearer year-end,” Folkerts-Landau wrote, so “things are going to script for our Q4 recession timeline.”
Additional headwinds in the latter half of the year will come from the government mandate for college graduates to resume repaying their federal student debt. For more than the past three years, there has been a moratorium on payments and interest accrual in place owing to the pandemic.
Fed reversal expected for March with ‘aggressive’ easing to come
Worse, Deutsche estimates the United States will stay there in the year to come—just as the November presidential election campaign kicks off with the Iowa caucus. In fact, it believes the U.S. will be the only leading industrial nation to see its economy shrink in 2024, when activity will contract by four-tenths of a percent after adjusting for inflation. By comparison, it should still grow by 1.4% this year, according to Folkerts-Landau’s team.
Other G7 countries have little reason to cheer either, though. The rosiest 2024 performance could top out at a tepid 0.8% in Japan, while both Germany and the eurozone as a whole should expand at a rate of just half of one percent.
Deutsche believes that businesses and consumers have not yet adjusted to the current higher interest-rate regime, following a decade or more with rates either negative or effectively zero, as well as near-continuous quantitative easing across the U.S. and Europe.
Geopolitical tensions, in particular with regard to the war in Ukraine, as well as food price inflation from a possible El Niño weather phenomenon could pose additional curveballs that are difficult to calculate but could have major implications for growth.
Markets might however brush the disappointing performance aside, as the bank expects the Federal Reserve will embark on an “aggressive” policy-easing cycle starting in March that brings the Fed funds rate from its 5.4% terminal level down to 2.625% in the third quarter. On Wednesday, the Fed did not hike for the first time after 10 straight meetings.
As a result, the S&P 500—which typically prices in future developments roughly six months in advance—should finish this year at 4,500, up from 4,373 currently and 3,840 at the start of this year.
“We expect the grind higher to be choppy,” Deutsche cautioned.