Deutsche Bank emerged as the primary significant investment bank to anticipate a crisis in the United States in April 2022, amidst the early stages of the Ukraine war and soaring inflation nearing levels not seen in four decades. David Folkerts-Landau, the 153-year-old chief economist at the German institution, projected that the Federal Reserve would inevitably need to swiftly increase interest rates to “err on the side of caution,” potentially triggering a “mild” crisis by late 2023 or early 2024.
In the subsequent months, Folkerts-Landau initially leaned towards a more cautious outlook. Concerned about the Fed’s struggle to manage inflation, he contemplated the possibility of a more severe crisis in the U.S. However, he eventually reverted to his initial prediction of a “mild” crisis.
Despite a more optimistic outlook from many Wall Street economists, Folkerts-Landau and his Deutsche Bank colleagues remain apprehensive. They believe that the U.S. economy, burdened by persistent inflation and rising interest rates, is on the brink of a significant downturn, contrary to the notion of a “soft landing” where interest rate adjustments curb inflation without triggering a recession.
In a recent note co-authored with Jim Reid, Deutsche Bank’s head of international economics and conceptual research, they highlighted a consistent narrative over the past few years, foreseeing a traditional policy-driven economic cycle culminating in a U.S. recession by late 2023. They affirmed the persistence of their narrative, asserting that the mild recession they anticipated is now unfolding.
The pair emphasized that despite positive economic indicators such as robust third-quarter GDP figures and favorable inflation reports, the U.S. market’s vulnerabilities, stemming from prolonged inflation and interest rate hikes, could lead to an eventual collapse.
Folkerts-Landau and Reid suggested that the anticipated “mild downturn” could materialize as early as early 2024, attributing uncertainties in the timing and impact of monetary policy actions to potential delays in addressing economic challenges.
Drawing on historical precedents, they pointed out the heightened risk of a crisis in the next two to three quarters, citing indicators such as elevated unemployment rates and surging credit card delinquencies as early warning signs of an economic slowdown.
Looking ahead to mid-2024, Deutsche Bank foresees a market recovery, anticipating that the Federal Reserve will commence interest rate reductions as the U.S. economy enters a recession and inflation stabilizes around the 2% target. This adjustment is expected to facilitate a gradual economic recovery, potentially bolstering the stock market’s performance.
Moreover, Folkerts-Landau and Reid expressed optimism regarding the transformative impact of artificial intelligence (AI) on productivity growth. They anticipate that AI advancements will enhance productivity and drive economic prosperity, mitigating risks posed by geopolitical tensions and economic uncertainties.
As the world contemplates a potential slowdown in 2024, the duo at Deutsche Bank views AI as a promising solution to navigate future challenges and capitalize on emerging opportunities in the global market.
