Deutsche Bank has cautioned that a “major recession” is on the horizon in a note to clients on Tuesday.
The Frankfurt-headquartered bank issued the stark warning in a report titled “Why the coming recession will be worse than expected,” in which it noted that the Federal Reserve must act more quickly and aggressively to prevent long-term damage to the economy.
“We will get a major recession,” Deutsche Bank economists wrote, noting that there “are good reasons to expect inflation will continue to surprise to the upside and in its stubbornness to remain well above the policy targets.”
“We regard it, therefore, as highly likely that the Fed will have to step on the brakes even more firmly, and a deeper recession will be needed to bring inflation to heel,” they continued.
Economists forecast a recession to begin in late 2023 or early 2024.
“In short, the scourge of inflation has returned and is here to stay. While we may have seen the highs now, it will be a long time before it recedes back to acceptable levels near the Fed’s 2 percent target,” the bank continued, suggesting that interest rates would likely be raised significantly by the central bank, and in turn, would harm the economy.
Economists said they see the Fed having to raise the federal funds rate to 5 to 6 percent in order to get inflation under control. Currently, the fed funds rate is 0.25 to 0.5 percent.
“As a society, monetary tightening is a policy that affects all of us; and it is sorely tempting to take a go-slow approach hoping that the U.S. economy can be landed softly onto a sustainable path. This will not happen.”
Deutsche Bank said it believes that the only way to minimize the damage inflicted upon the economy and society via crippling inflation is to “err on the side of doing too much.”
“Markets just need to be shown that the Fed will do what is necessary and not tolerate prolonged inflation, even if it is ‘only’ in single digits,” economists continued. “The U.S. is extremely fortunate in having an apolitical central bank that does what is right for the country even if that means an unavoidable recession.”
According to the bank, a number of factors are contributing to sky-rocketing inflation, including rising costs, consumer demand, a tight labor market, and disruptions to the supply chain. Meanwhile, the ongoing Russia–Ukraine conflict is further exacerbating the situation, it said.
Similar to Deutsche Bank, Roubini, a professor of economics and international business at New York University’s Stern School of Business, pointed to several events that have led to a current slump in the economy, which also include disrupted global supply chains, tight labor supply, and Russian President Vladimir Putin’s “special military operation” in Ukraine.
“There are many reasons to worry that today’s stagflationary conditions will continue to characterize the global economy, producing higher inflation, lower growth, and possibly recessions in many economies,” he wrote.
Yet while Deutsche Bank is bracing for a major recession, economists noted that they see the economy picking up again by mid-2024 as the Fed reverses course.
