Expert Analysis: Economic Recession Unavoidable, According to Deutsche Bank

Given the durability exhibited by the labor market and consumer spending, despite considerable interest rate rises, the prospect of a U.S. recession has been a hotly debated subject. But a major financial company, Deutsche Bank, has brashly asserted that there is a 100% chance that the US economy would contract.

The benchmark fed funds rate for short-term borrowing is now at its highest level since 2006. Inflation, however, keeps rising over the Federal Reserve’s planned aim. In response, Fed Chairman Jerome Powell issued a warning that further rate increases may be required to successfully reduce inflation. In a recent policy committee meeting, Powell emphasized this point by saying, “Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2% over time.”

Deutsche Bank

The median prediction made by the Federal Reserve for the Fed funds rate in the upcoming year is 5.6%, which is higher than the previous prediction made in March of 5.1%. Additionally, this amount exceeds the current Fed Funds Target of 5% to 5.25%.

Concerns regarding the financial viability of the country are raised by Deutsche Bank’s claim that an economic slump is inevitable. Even if there are still arguments over it, the bank’s authoritative position has a big impact on the economy.

A recession is inevitable, and market players and experts are keeping an eye on these events. Efforts to control inflation and anticipated rate increases will likely have an influence on how the economy develops in the coming months. The financial world is anxiously awaiting the development of these elements and their potential effects on the American economy.

According to Deutsche Bank,

their forecast for a number of economic indices shows a troubling picture. These are their main forecasts:

  • Interest rates: According to Deutsche Bank, the federal funds rate will rise by at least one further 25 basis points in July. While there has been some improvement in the labor market’s stability and the rate of inflation, both aspects still fall short of the goals set by the Federal Reserve.
  • The bank anticipates a downturn in consumer spending, with extra savings being essentially used up by October. This change could have an effect on the economy as a whole.
  • Unemployment rate: It is predicted that the unemployment rate would rise steadily, hitting 4% by the year’s end and reaching 4.5% in the first quarter of 2024. Notably, the unemployment rate for May was 3.7%.
  • Economic expansion: According to Deutsche Bank, there will be a “moderate recession” that will start in the last quarter of this year and last until the first quarter of 2024. The bank forecasts a 0.4% decrease in 2024 as opposed to the 1.4% rise anticipated in 2023.
  • Inflation is anticipated to be around 2.75% for the Consumer Price Index (CPI), and around 3.5% for the core CPI, which excludes the erratic food and energy sectors. The consumer price index was 4% in May.

These forecasts from Deutsche Bank point to an uncertain economic future that will be marked by sluggish consumer spending, a mild recession, and inflationary pressures. Although these predictions provide useful information, it’s crucial to keep in mind that economic conditions can change quickly and that other factors may have an impact on the final result. Keeping an eye on these variables will be essential for determining the economy’s trend and making future challenge plans.

There are other dangers.

The prospects for the investment bank may also be impacted by geopolitics. Both the U.S.-China strategic rivalry and the war between Russia and Ukraine might worsen.

Strong El Nio events that result in higher food costs are “another risk,” according to Folkerts-Landau’s team.

Are there any positives?

Artificial intelligence, undoubtedly.

We desperately need a new source of growth due to our deteriorating demographics, low productivity, and unfavorable cyclical outlook, according to Folkerts-Landau. AI may be that source. He said that it will likely be later this decade before AI starts to pay off.

He predicts that the Fed will begin lowering rates in March 2024 as a result of the anticipated decline in inflation and recession. Deutsche Bank anticipates cuts to occur as quickly as the Fed’s swift increase in the funds’ rate, “in increments of 50-basis-point to 75-basis-point until reaching 2.625%.”

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