Deutsche Bank says the US is heading for a deeper recession than previously expected, with unemployment set to jump

·3 min read
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Many analysts expect the US economy to slow sharply over the coming year.EVA HAMBACH/Getty Images
  • Deutsche Bank said the US economy is heading for a deeper recession than it previously expected.

  • Deutsche was the first big bank to predict a US recession when it made the call in April.

  • Since the Fed hiked interest rates by 0.75% last week, more Wall Street analysts are coming round to that view.

Deutsche Bank has said the US economy is heading for an earlier recession than the investment bank previously expected, that will drive up unemployment by almost two percentage points.

Since the Federal Reserve raised interest rates by 75 basis points last week — for its biggest hike since 1994 — Wall Street analysts have downgraded their forecasts for the US economy.

Deutsche was the first major bank to predict a US recession in April. It has been followed by others such as Nomura, and many more analysts have since said a severe and sustained economic decline is a distinct possibility.

The Fed's "aggressive hiking path" means the economy is going to slow sooner than previously thought, Deutsche's economists said in a note to clients published Friday and seen by Insider on Tuesday.

The US economy is likely to shrink at an annualized rate of 3.1% in the third quarter of 2023, and then by 0.4% in the fourth quarter, Deutsche said. Previously, it had penciled in the first contraction for the fourth quarter.

Overall, the German bank expects the US economy to slow to a crawl, growing just 0.7% in 2023, compared with 2022.

"More than two months ago, we forecasted that the US economy would tip into a recession by end-2023," Deutsche's team, led by chief US economist Matthew Luzzetti, said in the note.

"Since that time, the Fed has undertaken a more aggressive hiking path, financial conditions have tightened sharply, and economic data are beginning to show clear signs of slowing."

"In response to these developments, we now expect an earlier and somewhat more severe recession."

Deutsche Bank expects that as the US economy slows, unemployment will pick up relatively sharply from the 3.6% level, where it has hovered for the past three months. It expects unemployment to peak at 5.5% in 2024.

Luzzetti and colleagues said this situation would be similar to the downturns of the early 1990s and 2000s, which they described as modest.

There is a growing consensus that the Fed will have to abruptly slow down the economy as it seeks to tackle inflation.

The US central bank can influence spending in the economy by changing interest rates. Although economists debate the exact nature of the mechanism, higher interest rates are generally seen as making borrowing more expensive. That then reduces business investment, which in turn lowers hiring and cools wage growth.

Goldman Sachs Monday said it thinks the chances of a US recession arriving over the next year have doubled, from 15% to 30%. It puts the chance of a recession within two years at just under 50%.

The National Bureau of Economic Research is the arbiter of recessions in the US. It says a recession involves "a significant decline in economic activity that is spread across the economy and lasts more than a few months."

Read more: After another brutal week for stocks and a big rate hike by the Fed are we closing in on a market bottom? 3 experts weigh in on where all this leaves investors

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