The US heading towards a major recession, warn bankers

Deutsche Bank and Goldman Sachs have warned of a major recession in the US. While the bank’s economists wrote in a report to clients that “we will get a major recession,” Goldman Sachs Senior Chairman Lloyd Blankfein urged companies and consumers to gird for a US recession, saying it’s a “very, very high risk.”

The problem, according to the bank, is that while inflation may be peaking, it will take a “long time” before it gets back down to the Fed’s goal of 2 per cent. That suggests the central bank will raise interest rates so aggressively that it would hurt the economy.

“We regard it…as highly likely that the Fed will have to step on the brakes even more firmly, and a deep recession will be needed to bring inflation to heel,” Deutsche Bank economists wrote in its report with the ominous title, “Why the coming recession will be worse than expected.”

Consumer prices spiked by 8.5 per cent in March, the fastest pace in 40 years. The job market remained on fire, with Moody’s Analytics projecting that the unemployment rate will soon fall to the lowest level since the early 1950s.

Be prepared for it

“If I were running a big company, I would be very prepared for it,” Goldman’s Blankfein said on CBS’s ‘Face the Nation’ on Sunday. “If I was a consumer, I’d be prepared for it.”

A recession is “not baked in the cake” and there’s a “narrow path” to avoid it, he said. The Federal Reserve has “very powerful tools” to tamp down inflation and has been “responding well,” the former Goldman chief executive officer said.

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Blankfein’s comments were broadcast the same day as the firm’s economists cut their US growth forecasts for this year and next to reflect the recent shake-out in financial markets.

Behind the curve

To make its case, Deutsche Bank created an index that tracks the distance between inflation and unemployment over the past 60 years and the Fed’s stated goals for those metrics. That research, according to the bank, finds that the Fed today is “much further behind the curve” than it has been since the early 1980s, a period when extremely high inflation forced the central bank to raise interest rates to record highs, crushing the economy, a CNN report said.

History shows the Fed has “never been able to correct” even smaller overshoots of inflation and employment “without pushing the economy into a significant recession,” Deutsche Bank said.

Hope in sight

The good news is that Deutsche Bank sees the economy rebounding by mid-2024 as the Fed reverses course in its inflation fight.

Deutsche Bank said the most important factor behind its negative view is the likelihood that inflation will remain “persistently elevated for longer than generally anticipated.”

If inflation does stay elevated, the Fed will be forced to consider more dramatic interest rate hikes. The Fed raised interest rates by a quarter-percentage point in March and Chairman Jerome Powell conceded last week that a half-point hike is “on the table” at next week’s meeting.

With high fuel prices, US consumer sentiment declined in early May to the lowest level since 2011. US consumer prices rose 8.3 per cent in April from a year ago, slowing slightly from March but still among the fastest rate in decades.

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