A team of economists working for Germany’s Deutsche Bank revised the company’s official outlook earlier this year. According to the economic indicators they track, all signs now point to a “deep recession” looming.
Ongoing Developments Grimmer than Originally Thought
As one of Germany’s top investment banks, Deutsche Bank is usually regarded as one of the main influencers within the Eurozone. Therefore, back in April, their warnings of a possible “mild recession” were taken as both a warning and reassurance.
Up to that point, high inflation and low unemployment were singled out as unsustainable. In addition, there was a wide expectation that the Federal Reserve would adjust its interest rates for the new fiscal year to progressively slow down the economy.
However, the Federal Reserve steered clear of many of the recommended measures until well into 2022’s third quarter. This came on the heels of a summer with rapidly rising inflation, where the cost of consumer goods such as fuel quickly went above and beyond what many citizens could handle.
Now forced to undertake much more severe corrections, the economic outlook for early 2023 became much darker than originally expected.
What’s Pushing the Breaks on the World Economy?
Almost as relevant as the announcement itself is the rationale behind it. Upon closer examination, the Deutsche Bank’s report listed three main reasons behind its fears:
The necessary measures to curb inflation
The past 12 months have been characterized by a revitalized economy, which quickly gave way to over-acceleration. Combined with the increase in fuel prices caused by the conflict in Ukraine, both caused a sharp spike in consumer prices.
By March, people’s basic living expenses rose by 8.5%, followed by smaller increases of about 1% per month. However, key sectors such as electricity and food rose by 14 and 10%, respectively.
As a result, the Federal Reserve was eventually forced to increase its interest rates. What could have been a modest increase in March or April turned into a series of abrupt hikes between September and November, which totaled 75 basis points.
Record low unemployment
Another concerning factor is the current unemployment rate, which is now in the single digits, and at its lowest point since the 1950s. Low unemployment is generally considered a positive development, especially for working-class families.
On a macroeconomic level, it can make many anti-inflation measures harder. Low unemployment increases pressure on companies to offer more competitive salaries, and as such, it worsens wage inflation.
Past performance by the Federal Reserve
The final factor for Deutsche Bank’s pessimism is a historical one. In the past, the Federal Reserve has always been “one step behind” warnings and economic trends. Late action has led to ovecorrection, paving the way for a recession.
A good example? In the 1980s, inflation was decidedly less acute than it is now. And yet, the Fed’s measures plunged the country into a significant recession simply because they waited too long to act.
Dissenting Opinions Still Exist
While Deutsche Bank is one of its region’s opinion leaders, other experts on this side of the Atlantic consider it inherently pessimistic. One of the loudest dissenting opinions comes from investment giant Goldman Sachs. For this company and other US-based wealth management funds, a deep recession is not inevitable, although the Feds will need to be proactive to avoid it.
For Goldman Sach’s CEO David Solomon, we are looking at a 35% chance of recession. There’s time still to steer the ship away from murky waters, although it would be difficult to consider his outlook as “optimistic.”
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