The unique 40-year period from 1980 to 2020 characterized by mostly economic expansion in the U.S. will likely be replaced by a more regular pattern of boom-bust cycles and frequent recessions, according to analysts at Deutsche Bank
One reason is that higher inflation over the coming decades will limit central banks’ room to maneuver in and outside the U.S., given the pressure to not sacrifice economic growth, the analysts wrote in a long-term asset return study released on Monday. Meanwhile, with debt-to-GDP levels now at multidecade highs, there is the question of whether U.S. deficits can continue being used by the government to extend the business cycle, considering that borrowing costs are becoming structurally higher.
Deutsche Bank’s take includes one bright note — that frequent recessions tend to translate into stronger long-run growth — and comes as investors and traders have been debating if and when the U.S. might slip into what some describe as the most anticipated downturn ever. The U.S. has fallen into six recessions since January 1980, four of which lasted just two to eight months. As of this month, the world’s largest economy has already met four of the so-called “triggers” that Deutsche Bank says are needed over a 12-month period during a more prolonged run-up to a recession: Increasing inflation and an inverting yield curve, as well as rising short-term rates and oil prices.
“All-in-all, we think the most likely future is one of more frequent recessions and more boom-bust cycles. Ultimately, the long expansions of the last 40 years are likely to prove rarer moving forward,” said Jim Reid, head of global economics and thematic research, strategist Henry Allen, and analyst Galina Pozdnyakova. “That may seem undesirable on the face of it, but history tells us that recessions aren’t necessarily bad for growth in the long term. Indeed, looking at our sample of G-7 countries, it is the U.S. that has had the most frequent recessions, but has stronger economic growth than its peers.”
Artificial intelligence has the potential to render some industries and jobs obsolete, and “move us away from the managed, zombie-type world of the last couple of decades,” they wrote. “Whether it’s because the golden macro era of 1980-2020 is behind us or whether it’s because AI will significantly disrupt the status quo, the most likely scenario is that the era of long business cycles is over.” While this doesn’t need to be negative for long-term economic performance, “it will clearly maintain macro volatility into a system that was used to long periods of low volatility prior to the pandemic.”
In the U.S., recessions have made up a disproportionate amount of the 10%-plus selloffs historically seen in the S&P 500 index. The median and average drawdown in these recessions is -21% and -26%, with 1932 or the height of the Great Depression producing the biggest selloff on record, according to Deutsche Bank.
Nonetheless, the U.S. has maintained consistently better long-term equity performance than its G-7 peers given its more business-friendly financial system, according to Deutsche Bank’s research. That is demonstrated in the data on nominal and real multiasset class returns going back more than 200 years, where possible, for numerous developed- and emerging-market economies.
The Deutsche Bank team said its goal with the study wasn’t to answer the question of whether the U.S. or Europe will fall into a recession soon. Rather, Reid, Allen and Pozdnyakova said they wanted to look at what history says about the frequency, depth, and duration of recessions —along with what causes them.
Like the multiasset team at Rotterdam-based asset manager Robeco, Deutsche Bank takes a long-term view of events and steers clear of making any outright recommendations for investors.
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Frankfurt-based Deutsche Bank, often referred to as Wall Street’s most pessimistic bank, was the first big-name bank to call a U.S. recession in April 2022. The firm proved to be prescient in September of that year when it saw an almost 5% fed-funds rate on the horizon, six months before it came to fruition.
On Monday, all three major U.S. stock indexes
finished barely higher after failing to hold on to earlier gains, as investors looked ahead to the Federal Reserve’s policy announcement in two days. Meanwhile, the policy-sensitive 2-year Treasury yield
ended at a six-month high of 5.062% on heightened inflation angst.
Read: Powell could still hammer U.S. stocks on Wednesday even if the Fed doesn’t hike interest rates