World economy: Deutsche Bank warns fight to stem inflation will spark global recession

One of the world’s biggest banks has heralded disaster for 2023 as governments battle to stem the rapidly rising inflation tide.

Deutsche Bank highlighted a number of concerns putting the global economy under pressure, including “very tight labour markets” and ongoing supply chain issues initially sparked by pandemic restrictions.

“Wage and price inflation in the US and Europe is running considerably higher today than at any time since the last great inflation [period] four decades ago, thanks to robust aggregate demand, very tight labour markets, and supply-side shocks and constraints,” an excerpt from Deutsche Bank research documents read.

The bank also warned that the necessary measures taken by governments to ease inflation back to “desired levels” will come at a serious cost to the Western world.

“We read the Federal Reserve and ECB (European Central Bank) as being absolutely committed to bringing inflation back to desired levels within the next several years,” the research continued.

“Although the costs in doing so may be lower than in the past for reasons we lay out, it will not be possible to do so without at least moderate economic downturns in the US and Europe, and significant increases in unemployment.

“The economic downturns along with the aggressive monetary tightening and geopolitical and commodity shocks that induce them will be temporarily painful in financial and emerging markets.

“We see major stock markets plunging 25 per cent from levels somewhat above today’s when the US recession hits, but then recovering fully by year-end 2023, assuming the recession lasts only several quarters.”

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It followed similar comments from West Australian Premier Mark McGowan. who this week warned a recession is coming next year after previously only flagging it was a risk.

His comments came while fielding questions from reporters about an ongoing pay dispute with striking nurses, reiterating that the current deal on offer was generous.

“We expect a recession is coming next year,” Mr McGowan said.

“Virtually every economist around the world is saying the world economy will go into a recession, so just read what the Commonwealth Bank publishes, or what the World Trade Organisation publishes, the European Community, the Federal Treasury in America – they’re all predicting a recession around the world.

“WA is in a very good position. We’re the only state paying down debt, we’re the only state in surplus, we have a very robust economy and good trading relationships.”

Misha Ketchell, editor of The Conversation, said Australia may escape the full force of a global recession, but warned economic growth will be severely slowed.

“One thing we do know is that global economic growth, including growth in Australia, will be far slower over the coming two years than we expected mere months ago,” he wrote in November.

“We over-estimated the global economy’s ability to smoothly rebound from the pandemic. And we didn’t anticipate Russia’s invasion of Ukraine.”

RBA Governor Philip Lowe also highlighted the impact of recent world affairs on historically high levels of inflation, with Australians facing a rise of 8 per cent in the consumer price index by the end of the year.

“The very recent past has served as a powerful reminder of just how influential the supply side can be, with Covid disruptions and Russia’s invasion of Ukraine contributing to the highest inflation in decades,” he said.

Senior economists have predicted that the RBA will lift the cash rate by at least another 25 basis points by the end of the year, with Westpac predicting that the rate could peak at 3.85 per cent next year.

Dr Lowe indicated rate hikes could become more aggressive in response to ever-rising inflation.

“If we need to step up to larger increases again to secure a return of inflation to target, we will do that,” he said.

Just how aggressive the hikes will be will rely on how the Australian economy unfolds over the next few months.

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