The analysts at Deutsche Bank predict that the unique 40-year period of mostly economic expansion in the U.S. from 1980 to 2020 will be replaced by a more regular pattern of boom-bust cycles and frequent recessions.
One reason for this expected shift is the higher inflation projected for the coming decades, which will limit central banks’ ability to stimulate the economy. Additionally, the high levels of debt-to-GDP raise concerns about whether the U.S. government can continue using deficits to prolong the business cycle, given the rising borrowing costs.
Deutsche Bank’s analysis suggests that more frequent recessions can actually lead to stronger long-term growth. They point out that the U.S. has experienced more recessions compared to its peers in the G7, but still maintains better long-term equity performance due to its business-friendly financial system.
The analysts also mention the potential impact of artificial intelligence (AI) in disrupting industries and jobs, which could contribute to a shift away from the long business cycles of the past. While this change may introduce more macroeconomic volatility, it doesn’t necessarily imply negative long-term economic performance.
Historically, recessions in the U.S. have resulted in significant stock market declines, with the median drawdown during recessions being 21% and the average drawdown being 26%. However, Deutsche Bank’s research shows that the U.S. has consistently outperformed its G7 peers in terms of long-term equity performance.
The Deutsche Bank analysts emphasize that their goal was not to predict whether the U.S. or Europe will experience a recession soon, but rather to study the frequency, depth, and duration of recessions based on historical data.
Deutsche Bank, known for its pessimistic stance, accurately predicted a U.S. recession in April 2022 and the subsequent rise in fed-funds rate. The bank cautions investors against making specific recommendations based on their findings.
As of Monday, the major U.S. stock indexes showed modest gains, and Treasury yields were mixed while investors awaited the Federal Reserve’s policy announcement.
