Economic leaders are looking to the past for some inspiration on how to deal with the present—the only issue is, no one seems to be able to agree which past era they should be studying.
Deutsche Bank believes the U.S. economy closely resembles the turbulent times of the 1970s, an outlook prompted by the war in Israel, oil shocks, and rampant inflation.
Meanwhile economists at the White House say the inflationary period after World War II acts as a better guide because pent-up demand from the pandemic will eventually fade away.
UBS disagrees with both, saying the 1990s more closely resembles the economic climate world leaders are currently attempting to navigate.
A note from the UBS Chief Investment Office, led by Jason Draho, questioned whether the 2020s would act as “another roaring ’20s” seen a century before.
During this period, technological advances led to a rapid increase in productivity, while major industries like automotive, film, and chemicals took off.
The data suggests today’s economy has officially entered a new regime, UBS outlined: “A regime is defined by its growth, inflation, and rate attributes. These are all at their highest levels since prior to the global financial crisis (GFC).”
The note says a roaring ’20s is possible in a bullish scenario, highlighting five factors are necessary to bring this to fruition.
These include inflation being “contained” below 3% (it has already worked its way down from a peak of 9.1% in June 2022 to 3.7% in Sept 2023); widespread investment across the economy; a more dynamic economy after the pandemic; fading policy headwinds; and last but not least, an increase in productivity.
The latter factors are those which UBS believes are the least likely to come to reality, and therefore the Swiss bank points to the 1990s as a better template for how the rest of this decade should be handled.
“The current hiking cycle is reminiscent of 1994,” wrote Draho and his team. “The economy then had a soft landing in 1995, which we expect in 2024.
“The rest of the ‘90s was characterized by faster growth, rising productivity, and disinflation.”
Writing on LinkedIn, Draho added, “Rather than call this scenario roaring ’20s, a better name is ’90s redux because of the parallels to that decade.”
An unusual economy
Despite their proposals, Draho’s team made it clear that the economy is currently in a state of flux that makes forecasting very difficult.
Many on Wall Street were bracing themselves for a hard landing at the start of the year, a downside that never came to fruition.
Instead, UBS points out, the U.S. saw growth in GDP—up 4.9% in Q3 2023—despite aggressive Fed rate hikes that saw the base rate pulled to the highest in 22 years.
Likewise uncertainty in the bond market saw certain Treasury yields at 16-year highs, before legendary investors like Bill Ackman were forced into U-turns amid increasingly uncharted waters.
“These outcomes are opposite of consensus forecasts at the start of the year,” wrote UBS.
“The bottom line: Something is afoot with the U.S. economy,” Draho added.
It all hinges on supply
Many of the thorns in the U.S. economy’s side have been brought about because of supply issues.
Oil is one: The 13 member nations of OPEC, which produce roughly 80% of all crude, are now producing less oil than at any time since August 2021.
Saudi Arabia and Russia also both decided this summer to cut their oil production by 1 million and 300,000 barrels per day, respectively, through the end of the year.
Critical minerals are another—this month China announced that it will require a special export license for battery-grade graphite, effectively restricting sales to international markets.
Critical minerals such as lithium, cobalt, and graphite are essential for the manufacturing of batteries for electric vehicles, and the Chinese government currently controls more than 90% of the world’s supply.
UBS said the supply issues were even wider: “Supply-chain problems plagued the economy during the pandemic. While those have eased, supply issues will keep dominating—from labor and housing shortages, to new investment and technologies being positive supply shocks.”
As well as supply issues, UBS outlined several other factors that could also prevent a “roaring” ’20s: “Several of them, including geopolitical conflicts, political dysfunction, and a debt crisis are essentially policy choices that could be avoidable but are hard to predict.
“Others risk factors are an energy crisis, climate disasters, and AI fizzling.”
