Two major investment firms, BMO Capital Markets and Deutsche Bank, have said that the U.S. economy might go into a recession by the end of 2024 despite sustained economic growth and robust stock market performance.
The outlook on economic growth has shifted in 2023, with investors now viewing strong financial indicators as a potential threat to stock prices due to the likelihood of maintaining high interest rates. As reported by Business Insider, weaker economic indicators are now seen as grounds for fewer rate hikes or even potential rate cuts.
Last week, economists at DB issued an outlook report predicting that the Federal Reserve will implement more aggressive rate cuts. DB anticipated an initial rate cut of 50 basis points in June 2024, followed by an additional 125 basis points in cuts throughout the remainder of the year. In total, they forecast 175 basis points in rate cuts during 2024.
If the forecasts were accurate, the Fed rate would drop to 3.5- 3.75 percent by the end of 2024 from its current level of 5.25-5.5 percent. This is higher than market expectations of 4.48 percent by December 2024, according to LSEG data.
The recession could lead to "a pretty sharp rise" in the unemployment rate to as far as 4.6 percent, said Brett Ryan, the bank's senior U.S. economist, in an interview with Reuters.
"We see the economy hitting a soft patch in the first half of the year that results in a more aggressive cutting profile starting in mid-year," Ryan said.
The collapse of Silicon Valley Bank and several other U.S. regional banks earlier this year sent shockwaves through global markets, raising concerns about the financial sector's stability. DB warned there could be lingering vulnerabilities in regional banks, commercial real estate and private markets from this event
Positive notes
Despite the negative outlook, DB also anticipates that the economic slowdown will "ease inflationary pressures," Ryan said.
DB anticipates double-digit profit growth even amidst a subdued economic landscape. BMO also projects a 13.6 percent increase in earnings, labeling the potential recession "a recession in name only."
Despite the Fed's aggressive rate since March 2022, the U.S. economy has shown resilience and defied recession predictions. The International Monetary Fund (IMF) projects the U.S. economy to remain among the strongest developed market performers, with GDP growth expected to reach 2.1 percent in 2023 and 1.5 percent in 2024.
BMO favors the financial and information technology sectors for 2024, while DB recommends an overweight position in financials, materials and consumer cyclicals for 2024.
Global economy outlook
Aside from the U.S., some major banks also anticipate a slowdown in global economic growth next year. A Reuters poll finds the market expects the economy to grow 2.9 percent in 2023, followed by a deceleration of 2.6 percent in 2024.
While most economists believe banks will avoid global recession, they warn of the possibility of "mild recessions" in Europe and the U.K. Weaker growth momentum and tighter fiscal and monetary policies could prompt the European Central Bank to pause or even reverse its rate hike cycle in the second half of 2024.
"In the Euro Area, Q3 saw a -0.1 percent decline in GDP, with the economy in a period of stagnation since Autumn 2022 that will likely extend to mid-Summer 2024," DB's head of global economics and thematic research, Jim Reid, and group chief economist David Folkerts-Landau said in the report. This is why DB projects Canada to outperform its G7 peers in 2024, with a GDP growth rate of 0.8 percent.
Goldman Sachs Asset Management economists also observe divergent growth and inflation patterns across regions. Japan's economy rebounds with resurgent domestic demand, while China's growth falters amid property market woes and demographic challenges.