Majority of Big Banks Predict Global Recession, Though Mild, in 2023

by Meir Sternhill

The big banks are wary of making predictions after getting inflation so wrong last year, but over two thirds of them are expecting a global recession by the end of 2023. They emphasize that the strong job figures mean it will likely be a mild one.

The majority of economists at the country’s 23 prime dealers — which are large financial institutions that are permitted to do business directly with the Federal Reserve — told the Wall Street Journal that all signs are pointing to a global downturn. Two of them are confident the economy is holding up enough to push off a recession until 2024.

The trading firms and investment banks expressed concern that the stimulus money handed out to Americans is nearly all spent, the number of house purchases are in decline, and that banks are tightening their lending standards. This is due to the Federal Reserve’s historic rate hikes, which raised borrowing costs from the range of zero to 0.25% to the current 4.25% to 4.50%, a 15-year high. This was meant to slow inflation by making money harder to borrow.

“We expect a downturn in global GDP growth in 2023, led by recessions in both the U.S. and the eurozone,” economists at BNP Paribas SA wrote in the bank’s 2023 position book. It was titled “Steering Into Recession.”

The Fed signaled in December that it plans to raise rates by an additional point this year.

The unemployment rate, now at a record low of 3.7%, is expected rise above 5%. While low by historical standards, this would rob millions of Americans of their jobs, leading the economy to fall into recession.

Economists are mindful that they spent 2021 poopooing talks of inflation, then watching costs balloon by above 8% month after month. They are therefore more careful about predicting a recession now. But the banks note that a number of indicators that have traditionally heralded previous recessions is present.

These include the banks tightening standards to whom they are willing to lend. This, in turn, has weakened demand to near levels typically associated with recessions.

Also, people are snapping up government bonds which mature after decades and are hesitant to buy shorter term bonds. This inverted yield curve — which has the government paying a higher interest rate for bonds that mature between three months and two years than bonds maturing in 10, 20 or 30 years, has occurred before every U.S. recession since World War II.

Another concern is that the savings Americans put away from pandemic aid packages is less than half of what it once was — $2.3 trillion at the height of Covid to about $1.2 trillion today. At this rate, Deutsche Bank analysts expect it to be fully exhausted by October.

This outlook is not universal. Five of the 23 banks surveyed expect the U.S. to entirely avoid recession. Jeremy Schwartz, a senior economist at Credit Suisse, wrote in the bank’s 2023 economic outlook that while the historical indicators appear to suggest a recession was coming, “in our view these measures are unable to correctly gauge recession risk in the current environment.” Instead, he predicts the economic growth will be more limited.

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