Deutsche Bank economists have updated their 2024 US economic outlook from expecting a mild recession to now forecasting continued expansion and growth, though at a slower pace. This makes them the first major bank to walk back an earlier recession prediction.
Bank Now Expects “Narrow Landing” With Slower But Steady Growth
In an analyst report released Monday February 6th, Deutsche Bank chief US economist Matthew Luzzetti wrote that the bank’s economists have revised their 2024 forecast to expect a “narrow landing” rather than a downturn. This refers to an economy that continues growing while avoiding high inflation on one extreme and recession on the other.
While Deutsche Bank still sees US GDP growth decelerating from estimated 2.1% in 2023 to just 0.7% in 2024, they no longer expect an outright contraction in economic activity. Other key updated forecasts include:
Luzzetti wrote that “the risks of a recession have substantially faded over recent months,” thanks to a combination of factors making a soft landing more likely.
Fed Policy Outlook More Favorable, Labor Market Resilient
Two cited reasons for Deutsche Bank’s adjusted forecast were an easing of Federal Reserve policy tightening plans as well as ongoing resilience in the US jobs market.
The Fed’s aggressive interest rate hikes through 2022 are now expected to downshift going forward, with perhaps just two more 0.25% increases this year. This reduces likelihood of the central bank inadvertently triggering a contraction. At the same time, consumer spending has so far remained solid and the labor market continues adding hundreds of thousands of jobs monthly.
“The risks of a recession have substantially faded over recent months thanks to the combination of resilient domestic demand, an uptick in household savings rates, easing financial conditions and falling energy prices,” Luzzetti summarized.
Easing Headwinds Improve Growth Trajectory
In addition to less aggressive Fed policy and persistent job market strength, Deutsche Bank economists see other building headwinds as having eased substantially since their initial recession call. These include:
Inflation Reduction – Core CPI inflation has clearly peaked and is expected to gradually ease toward the Fed’s 2% target through 2024. This will reduce pressure on household budgets and business costs.
Supply Chain Improvement – Backlogs and shortages in global logistics networks and critical manufactures like semiconductors have steadily abated. This helps output catch up to still-resilient demand.
Geopolitical Stability – While uncertainties remain, major conflict risks around China/Taiwan and Russia/Ukraine have moderated somewhat, reducing downside economic risks.
Oil/Commodity Price Declines – Wholesale gas prices specifically have fallen back well below mid-2022 peaks, putting downward pressure on overall inflation.
Consumers Still Spending Despite Challenges
Surveys showed consumer sentiment ending 2022 near all-time lows, yet actual spending has remained surprisingly robust according to most data. Deutsche Bank thinks this resilience will continue thanks to still-strong household savings as well as improving inflation/financial conditions.
|US Consumer Spending Power
|2021 Personal Savings Rate
|Current Checking/Savings Balances
|Well above pre-pandemic levels
|Debt Service Ratio
|8.3% (Historic low)
|Consumer Confidence Index
|108.3 (September 2022 trough: 104.6)
“The risks of a recession have substantially faded over recent months thanks to the combination of resilient domestic demand, an uptick in household savings rates, easing financial conditions and falling energy prices,” Luzzetti wrote.
Global Outlook Also Brighter, Though Uneven
Deutsche Bank’s 2024 global growth forecasts were likewise revised up across the board, though performance is expected to remain unequal across countries and regions. The US and emerging economies appear best positioned thanks to domestic demand and policy stimulus respectively. Meanwhile Europe still faces significant energy/geopolitics headwinds and China’s outlook depends greatly on post-COVID reopening policies.
- United States: 2024 GDP growth forecast revised up from -0.2% to +0.7% on domestic resilience.
- Eurozone: 2024 GDP growth steady at 0.2% as energy challenges persist.
- China: 2024 GDP growth forecast raised from 4.1% to 4.4% assuming continued reopening.
- Emerging Markets: 2024 GDP growth seen accelerating from 2.7% to 3.1% on policy tailwinds.
Forecast Risks Not Eliminated Entirely
While substantially reduced, Deutsche Bank’s report still highlighted certain lingering risks that could upend their main forecast expecting positive US and global growth. Chief among these continue to be central bank policy error, geopolitical tensions, and adverse China developments.
Any major surprises leading the Fed or other central banks to resume aggressive tightening would renew recession risks according to Deutsche Bank. They estimate each 1% rise in real policy rates from current levels would reduce GDP by around 1% after a year.
Regarding geopolitics, a significant escalation of the Russia/Ukraine conflict or surprise over Taiwan/China relations could quickly dampen positive growth momentum. And in China, failure of the current reopening to sustainably boost activity would have adverse spillover effects globally.
For now though, Deutsche Bank economists view these downside scenarios as unlikely. Thus they have moved to an outlook expecting moderating but still positive US and global GDP performance, contrary to their previous mild recession expectations for 2024.
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