Wall Street Expects a Slowdown, Not a Recession, But …

Yogi Berra, the baseball great and off-beat social commentator, said it well: “I never make predictions, especially about the future.” Wall Street, however, can’t help itself from issuing economic auguries—and its consensus is reassuring, with one jarring exception.

Forecasts about the economy, while problematic, give people a glimpse of what to expect in their lives and investments—amid a world today beset by war, a persistent pandemic, waning government aid, high inflation, and climbing interest rates.

The outlooks distill all the bad news with the good news, such as low unemployment, strong corporate earnings, large household savings, and small debt loads. Weighing the good and the bad has resulted in an overwhelming consensus of investment firms and other economic observers that the U.S. won’t slip into a recession anytime soon (meaning this year or next), and will instead only experience a growth slowdown.

Which makes Deutsche Bank’s recent raspberry of a prediction all the more discordant. The prognostication makes it the first major bank thus far to spy a recession on the horizon. David Folkerts-Landau and Peter Hooper say in a report that the U.S. will fall into a recession next year, with all the usual lousy woes. They foresee the jobless rate, for instance, rising to 4.9% in 2023, from 3.6% most recently. Their culprit: the Federal Reserve and its tightening regimen.

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Despite Fed Chair Jerome Powell’s plan to bring the economy in for a “soft landing,” in his parlance, Deutsche Bank believes that higher interest rates will choke the economy. They think the Fed will end up shrinking its balance sheet by almost $2 trillion by next year, which is in line with most projections.

But by mid-2023, Deutsche Bank expects the federal fund rate to be 3.5%, which is almost a full percentage point above what the Fed estimates. The Fed will proceed with several half-point rate hikes in its next three meetings, which means the rate escalation will be front-loaded, Deutsche Bank states.

“Our call for a recession in the U.S. next year is currently way out of consensus,” Folkerts-Landau and Hooper contend. “We expect it will not be so for long.”

Indeed, a versus only 15% who anticipate one in 2022.

Officially, however, major investment firms are calling for a deceleration of growth, but not a recession, traditionally defined as two negative quarters in a row. Goldman Sachs Group’s take on this question is that an economic slump is “far from inevitable,” because, among other things, consumers are “flush” with cash.

Morgan Stanley has a kindred view. Inflation will slap the public with an average $1,600 hit to household consumption this year—yet the fat savings will offset that, it maintains. What’s more, although commodity price boosts (mainly food and gasoline) are vexing, they are sitting at far lower relative levels than in the 1980s, 2006, and 2012, the firm argues.

And Bank of America says that “slower-than-expected real GDP growth—not a recession—is our operating base case for the U.S. over the next 12 to 18 months.” Tailwinds such as companies’ massive inventory rebuilding and a fading pandemic will prevail, BofA declares.

The Conference Board crystallizes the slower-but-not-bad viewpoint. Economic growth will be 3.0% this year and 2.3% in 2023, the organization avers. That compares with last year’s heady 5.7% expansion.

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Tags: Conference Board, Deutsche Bank, Federal Reserve, Goldman Sachs, Inflation, jobless rate, Morgan Stanley, recession

Pension reform has always been a hot-button topic in France. In 2019, President Emmanuel Macron’s proposal to raise the retirement age and create a universal state-run pension system led to the longest worker strike in the history of modern France.

And now, just ahead of the French presidential election taking place this month, Macron has made pension reform one of the top issues of his campaign.

“He put it on the top of his platform,” says Michael Zemmour, a research fellow at Sciences Po in France who specializes in political and welfare economics. “This is more about confrontation about social rights and entitlements than [a] pure economic problem.”

Macron’s proposal is to raise the retirement age to 65 from 62. Marine Le Pen, Macron’s right-wing rival, wants to lower the retirement age to 60. France currently has the third highest level of pension spending in the entire OECD as a percentage of GDP.

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Hervé Boulhol, a senior economist at the OECD, says ballooning pension costs are a problem. Nevertheless, he thinks that continuing an arbitrary retirement age, which both politicians are proposing, isn’t the smartest way to go about things.

“One thing we keep saying is that it makes sense to at least link retirement age to life expectancy,” says Boulhol.

France has a pay-as-you-go system, which means that the pension funds are not invested before being paid out to beneficiaries. However, the pensions can still struggle with funding if there are too few young people paying in to support a growing older population.

French citizens will be going to the polls for the first round of elections this Sunday, April 10. If no single candidate wins the majority of the vote, which is likely to happen, then there will be a runoff election between the top two candidates. This second election will take place on April 24.