Economic Expectations: A Short Recession on the Horizon

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This autumn, as the temperature drops and leaves fall, the economy’s expectations are also taking a dive. Strategists suggest that a long-awaited recession might finally be on the horizon, but there’s good news—it’s likely to be short-lived.

Maximilian Uleer, the head of European equity and cross-asset strategy at Deutsche Bank, shares this view.

According to Uleer, “A mild recession in the first half of 2024 is still our base case.” However, he also highlights that “the US economy appears more resilient than anticipated.”

Uleer’s firm’s economists believe in a soft landing for the US economy. They anticipate a mild recession but predict that it won’t occur until the first quarter of next year, lasting only two quarters. This outlook is considerably brighter than Deutsche Bank’s earlier forecast, which anticipated a recession in the fourth quarter and estimated it would last for three quarters.

These revisions reflect the ongoing resilience of the US economy, particularly demonstrated by the robust labor market showcased in September’s jobs report. Another sign of resilience is consumer spending, which has surpassed pessimistic expectations despite the Federal Reserve’s interest rate hikes. Additionally, inflation, though still high, has shown signs of abatement. Deutsche economists predict it will reach the Fed’s 2% target by the first quarter of 2025.

As a result of these positive developments, Uleer states that his firm now expects US real gross domestic product to rise by 2.3% for 2023 (up from the previous forecast of 2.1%), and they project a 0.6% growth for 2024 (up from the previous estimate of 0.1%).

Furthermore, Deutsche Bank expects the Federal Reserve to reach a terminal rate of 5.4% and start cutting interest rates from June 2024 onwards, which is likely to aid in keeping any potential downturn shallow.

Naturally, Uleer and his colleagues are not alone in believing that the recession, long predicted since the beginning of the year, is finally on the horizon.

The Possibility of a Mild Recession Looms Over the U.S. Economy

Paul Ashworth, Chief North America Economist at Capital Economics, recently suggested that the United States could potentially face a mild recession or near-recession in the coming year. This prediction contradicts the optimistic outlook of the central bank regarding GDP growth and low unemployment rates.

Similarly, the Conference Board has also forecasted a brief and mild recession to occur in the first quarter of 2024 due to a decline in consumer confidence.

Despite the current strength in consumer spending, this stability appears uncertain, especially with the added pressures of impending student loan payments and increasing credit card delinquencies.

David Rosenberg, from Rosenberg Research, expressed his concerns about the vulnerability of the economy to a combination of negative shocks from interest rates, the value of the dollar, and oil prices. He believes that the recession, which has been delayed but not derailed, will begin in either this quarter or no later than the first quarter of next year.

The yield curve, another commonly used indicator for predicting recessions, has been signaling warning signs since April 2022. A yield curve inversion occurs when short-term government bond interest rates surpass those of long-term notes, indicating investors’ apprehension about near-term risk.

Ross W. LaDuke, Global Technical Strategist for Vermilion Research, pointed out that historically, each time the 10-year to 2-year Treasury yield curve has inverted, a recession has followed within 16 to 24 months. While there’s no guarantee that this inversion will invariably lead to a recession, historical patterns suggest that time may be running out as we are already 18.5 months past the initial inversion.

If a recession does occur, it is likely to be relatively short and mild given the strong economic environment. This would certainly be preferred by everyone during a downturn.

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