The Ticking Clock:

According to Deutsche Bank's leading research team, it seems that U.S. economists may have prematurely celebrated a smooth economic transition. The German multinational bank believes that the recent actions of policymakers in Washington have triggered a cycle of prosperity and decline, which is now approaching its final stage. In their analysis, they predict that a recession will likely occur as early as October, as a direct result of the aggressive interest rate hikes implemented in order to curb inflation caused by the COVID pandemic. In a research report titled "The Clock Is Ticking," the group's chief economist, David Folkerts-Landau, cautioned that avoiding a severe economic downturn would be highly unlikely based on historical precedents. This report was published on Wednesday.

In contrast to recent investor optimism and the perception that the Federal Reserve has successfully managed to cool down a booming economy without causing a recession, there is a grim outlook. This perspective suggests that the only consequence has been a decrease in asset prices, which has been referred to as a "non-recession recession" by private equity firm Apollo Global Management.

Germany's sole bulge bracket bank employs an indicator that seeks to gauge the likelihood of a recession within the next 12 months. At present, it is estimating the chances of a contraction in U.S. economic activity to be "almost certain," or close to 100%. However, there is a prerequisite for this outcome to materialize: consumers must exhaust their remaining savings accumulated during the COVID lockdowns. According to Folkerts-Landau, these savings are not expected to be depleted until closer to the end of the year, aligning with our projected timeline for a recession in Q4.

Furthermore, there are additional challenges in the latter part of the year stemming from the government's requirement for college graduates to resume repayment of their federal student debt. For over three years, payments and interest accrual have been suspended due to the pandemic.

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According to Deutsche's estimates, the United States is expected to remain in a challenging economic situation in the upcoming year, coinciding with the start of the November presidential election campaign and the Iowa caucus. In fact, it is predicted that the U.S. will be the only major industrial nation to experience a contraction in its economy by 0.4% in 2024, after accounting for inflation. In comparison, the U.S. is projected to grow by 1.4% this year.

However, other G7 countries do not have much to celebrate either. The best-performing economy in 2024 is expected to be Japan, with a modest growth rate of 0.8%. Germany and the eurozone as a whole are anticipated to expand at a mere 0.5% rate.

Deutsche believes that businesses and consumers are still adjusting to the current higher interest-rate environment, which is a significant shift from the previous decade when rates were either negative or close to zero. Additionally, continuous quantitative easing measures in the U.S. and Europe have also contributed to this adjustment period.

The potential for geopolitical tensions, especially related to the conflict in Ukraine, as well as the possibility of food price inflation due to El Niño weather patterns, could present unpredictable challenges with significant implications for economic growth.

However, the market may not be greatly affected by this disappointing performance, as the bank predicts that the Federal Reserve will implement an "aggressive" policy of easing starting in March. This would bring the Fed funds rate down from its current 5.4% level to 2.625% in the third quarter. On Wednesday, the Fed chose not to raise rates for the first time in 10 consecutive meetings.

Consequently, the S&P 500, which typically anticipates future developments about six months in advance, is projected to reach 4,500 by the end of this year, compared to its current level of 4,373 and the 3,840 at the beginning of the year.