Deutsche Bank, Citi See 50% Recession Chance as Rates Rise

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Deutsche Bank AG’s chief executive officer warned the global economy may be headed for a recession as central banks step up efforts to curb inflation, joining a growing chorus of executives and policy makers who are painting a pessimistic picture.

Christian Sewing, speaking at the Future of Finance summit in Frankfurt Wednesday, said the global economy is buckling under multiple strains, from supply-chain issues in China to rising food prices, particularly in the poorest countries. While the bank had predicted for some time that interest rates would rise to curb price increases, the pace at which central banks are now expected to tighten surprised him, he said.

“At least I would say we have 50% likelihood of a recession globally,” the Deutsche Bank CEO said in an interview. In the US and Europe, “the likelihood of a recession coming in the second half of 2023, while at the same time the interest rates go up, is obviously up versus the forecasts we had before the war broke out” in Ukraine.

His comments came on the same day that analysts at Citigroup Inc. made a similar prediction, citing supply shocks and higher interest rates. Sewing said despite the impact on economic growth, he supported the actions by central banks including the US Federal Reserve because they’re needed to bring down inflation, which he called a risk to democracy, to a more sustainable level.

Earlier this week, delegates at the second annual Qatar Economic Forum, from Tesla Chief Executive Officer Elon Musk and Nouriel Roubini to Atlas Merchant Capital’s Bob Diamond and StanChart’s Bill Winters, warned the United States was heading toward a recession. And Jamie Dimon, who runs JPMorgan Chase & Co., told investors in early June to prepare for an economic “hurricane” as the economy struggles against an unprecedented combination of challenges.

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“The experience of history indicates that disinflation often carries meaningful costs for growth and we see the aggregate probability of recession as now approaching 50%,” the Citigroup economists wrote. “Central banks may yet engineer the soft — or “softish” — landings embodies in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient.”

Citigroup now sees the world economy growing 3% this year and 2.8% in 2023. Its economists said if a recession did occur it was likely to be a “garden variety” one in which unemployment rises several percentage points and output experiences a couple of weak quarters.

“We see this as a reasonable expectation, but the wildcard — as we have emphasized — is how stubborn inflationary dynamics ultimately prove to be,” they said.

Deutsche Bank’s Sewing said his bank warned already a year ago that inflation wasn’t transient. He has urged central bankers repeatedly to raise interest rates and had been critical of ultra-loose monetary policies, particularly in Europe, where years of negative rates eroded banks’ income from lending.

The rate increases expected now are still a “net positive” for lenders, as long as they were prudent in assessing risks when handing out loans, Sewing said.

(Updates with Sewing comments on inflation and higher interest rates in final two paragraphs.)

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