Deutsche Bank warns that "the risk of an economic wreck has increased dramatically"

David Folkerts-Landau, chief economist at Deutsche Bank, is known for saying everything he thinks, he doesn’t mince words. In the past, it has repeatedly singled out the European Central Bank as the biggest risk to the Eurozone for its zero-rate and stimulus policies, while a year ago it warned about the danger that inflation would skyrocket. Now, Flokerts-Landau believes that the economy and markets are at serious risk of being shipwrecked with inflation again as a trigger.

“Threatening storm clouds are gathering around our outlook for the next two years. Inflation is reaching 6% or more in Europe and the US, while central banks continue quantitative easing. A new and more infectious strain of covid is spreading rapidly … while supply chains remain clogged with delivery times and transportation costs close to historic highs. Potential political turbulence driven by populists, weather storms and geopolitical storms are looming, “said this expert in a document for clients.

“The chances of a shipwreck have increased dramatically as we chart a course through dangerous waters. Calculating when a recession is going to hit is very difficult until it hits us. For now, a path to a safe harbor can still be seen, with a relatively soft landing, albeit with some favorable assumptions and a modicum of good luck. Several factors play in our favor “, assures the German economist.

This expert sees positive signs such as the micron variant that is proving to be less virulent than previous variants while vaccines develop much faster.

On the other hand, the factors that drove inflation, including the strong increases in energy prices and the rise in indirect taxes, have ceased or are being at least partially reversed.

Luckily for Landau, it seems that this will be the year of the ‘hawks’ (Flokerts-Landau is one of the most insistent raptors) and it is expected that “the central banks that are now behind the curve will move soon to correct this. through timely adjustment action.While historical experience suggests that it’s devilishly difficult to achieve a soft landingIt can be done and has been done. “

An inflation at 6%

Even if there is no wreck in the end, the waters will be turbulent given the environment of inflation, high debt and monetary tightening. Deutsche Bank awaits inflation close to 6% on average for developed economies in the first months of 2022, and specifies that this rate will decrease “more slowly than expected” as the year progresses.

Folkerts-Landau believes that these levels of precision will force central banks to adopt a more aggressive position, which could cause a negative reaction in financial markets and even an economic recession.

Although prices are likely to moderate in the next two years, there are structural factors resulting from decarbonization, among others, that will maintain the inflation rate higher than that registered before the pandemic.

Inflation is the biggest risk

Inflation represents the most important risk for the economy of those indicated by the German entity, followed by the persistence of the coronavirus and the disruption of supply chains.

Deutsche Bank believes that the supply pressures will last at least until the second half of next year, from when they begin to gradually disappear.

Regarding monetary policy, the entity anticipates four rate hikes this year and another three in 2023 in the case of the US Federal Reserve (Fed), while it considers it unlikely that the European Central Bank (ECB) will raise rates before the year. coming.

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