On Tuesday, Deutsche Bank became the first major bank to predict a US recession in 2023. The Federal Reserve’s fight to contain inflation will spark a recession that ultimately halts economic growth.
No More Soft Landing, US Headed for Recession in 2023
Fears of a recession in 2023 reflect growing concern that the Federal Reserve will slam the brakes on the economy.
Once this happens, the recovery program launched by the US two years ago will now come to a crashing halt. Deutsche Bank also believes that at this point, a soft landing is next to impossible.
Fears of a recession in 2023 started when the US economy overheated last year. Driven by inflation, consumer prices rose at their fastest rates in 40 years.
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Even so, the Federal Reserve hoped to cool off the overheated economy to lower prices drastically. However, Russia invaded Ukraine, so all bets were suddenly off the table.
Deutsche Bank economists led by Matthew Luzzetti issued a report warning about a US recession in 2023. “We no longer see the Fed achieving a soft landing,” they wrote. “Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession.”
Fed to Slow The Economy Down
Meanwhile, inflationary pressures spread out across the industries. This means that the Federal Reserve will need to raise interest rates quickly and substantially to temper the economy.
However, that would be easier said than done. Deutsche Bank pointed out that external pressures like Russia’s invasion already led to price surges in energy and food.
The economics team warned that the Federal Reserve will resort to extreme measures. Price stability can only happen “through a restrictive monetary policy stance that meaningfully dents demand.”
Broadly speaking, the Federal Reserve can’t just slam on the brakes on inflation. The agency will need to slow the entire economy down. This includes shrinking its balance sheet by selling off its bonds and securities.
It also needs to raise interest rates incrementally to fight inflation. Fed Governor Lael Brainard said Tuesday that “It is of paramount importance to get inflation down.”
Likely Mild Recession In 2023
Deutsche Bank warned that there’s uncertainty on the timing of the downturn. However, the bank did predict that the US economy will shrink from the 4th quarter of 2023 until the first quarter of 2024. The contraction will remain “consistent with a recession during that time.”
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Despite the doom scenario, Deutsche Bank said that the upcoming recession in 2023 won’t be as bad as the previous episodes.
Instead, it expects a mild recession consistent with a strong economy. DB said that unemployment will peak above 5% in 2024. While this means layoffs, a 5% unemployment rate is smaller than the 14.7% in 2020 and 10% in 2009.
The upcoming recession in 2023 will allow the Fed to bring inflation down to its 2% target by the end of 2024. By 2025, Deutsche Bank sees a return to normalcy.
“With the unemployment rate receding only slowly following the peak, inflation should continue to moderate,” it said. DB foresees the economy falling back to the Fed’s ideal 2% inflation rate by 2025.
Others Agree With Recession Fears
Other banks and economists also agree with the DB assessment. Many previously warned that the probability of a recession is imminent.
However, many do not see a totally cataclysmic downturn. Moody’s Analytics chief economist Mark Zandi predicted a one-in-three chance of a US recession. “Recession risks are uncomfortably high — and moving higher,” he said.
JPMorgan CEO and chairman Jamie Dimon also warn of “a slowdown that could easily get worse.”
On the other hand, Fed Chairman Jerome Powell still hopes to engineer a soft landing for the economy.
He pointed out that on numerous occasions, the market managed to land softly. This includes the years 1965, 1984, and 1994 as examples.
Watch the Quest Means Business video reporting that Deutsche Bank becomes the first big bank to forecast U.S. recession:
Do you agree that a US recession in 2023 is imminent? Will the Fed manage a soft landing for the economy? Tell us what you think. Share your thoughts in the comments section below.