Policymakers in the world’s largest economies have acknowledged that inflation needs to be reined in, no matter the cost, and bankers are now saying that a global economic downturn is increasingly likely.
This month, the U.S. Federal Reserve, the European Central Bank, and the Bank of England announced higher interest rates in a bid to tame inflation that is running at its highest rate in decades. But central banks pulling the emergency brake could have lasting repercussions on the global economy.
Deutsche Bank is the latest multinational banking firm to say an economic contraction is becoming more likely, and says there is a 50/50 chance of the global economy entering a recession next year, according to CEO Christian Sewing.
“We have a 50% likelihood of a recession globally,” Sewing said Wednesday during an interview with Bloomberg at the Future of Finance summit in Frankfurt.
He added that the war in Ukraine has scrambled economic forecasts, and has been a critical factor driving a higher recession risk in the near future.
“Not only for Europe, but also for the U.S., the likelihood of a recession coming in the second half of 2023—while at the same time interest rates are going up—is obviously up versus the forecasts that we had before the war broke out,” he said.
Sewing joins a chorus of bankers who have been ringing the alarm bells over an imminent recession. Earlier in June, Morgan Stanley CEO James Gorman predicted a 50/50 chance of a recession within the next year, while last month, JPMorgan Chase chief Jamie Dimon warned of an economic “hurricane” on the horizon, shortly after Wells Fargo CEO Charlie Scharf said there was “no question” the U.S. was headed for a recession.
The Ukraine war—now entering its fifth month—has sent global fuel prices surging, and that has had severe repercussions on the global economy. The World Bank recently downgraded its global economic growth outlook for this year from 4.1% to 2.9%, mainly due to the consequences of the war, and experts have warned that countries with close market ties to Russia and Ukraine—including in Europe—are set to be hit the hardest.
“The war is a serious setback to Europe’s strong yet incomplete recovery from the pandemic,” Alfred Kammer, director of the European Department at the International Monetary Fund, wrote in April. “Ukraine and Russia face the sharpest economic contractions, but other countries could also fall into recession this year.”
The Ukraine war is pulling most of the weight in this year’s downgraded economic forecasts, but it is far from the only factor, according to Sewing. COVID-19 lockdowns in China affecting supply chains, the lingering effects of the pandemic, and rising food prices are also scrambling economic expectations, Sewing said, and the fact that these things are all happening at the same time is making markets more uncertain than ever.
“We have overall a very challenging time,” Sewing said on Wednesday. “Addressing these three, four items—with inflation that we haven’t seen in 40 years—I think this is a time where making predictions on the future is incredibly hard.”
But in spite of the rising recession risks, Sewing acknowledged in an interview with CNBC on Monday that inflation is the most pressing concern at the moment.
“I would say that the inflation is something that really worries me most,” he said. “We need to fight inflation because at the end of the day, inflation is the biggest poison for the economy.”
