The economic world we’ve gotten used to since 1982—where recessions are few and far between—may be coming to an end.
Key Takeaways
- Recessions will be more common in the future, economists at Deutsche Bank predict.
- The strategies that countries have used to prevent downturns: deficit spending and monetary stimulus from central banks, are getting harder to use because of growing national debts and economic factors pushing up inflation.
- Economies have followed boom-and-bust cycles for most of history, making the past 40 years of relative stability something of an aberration, the economists argue.
That’s according to a research paper by economists at Deutsche Bank published Monday, who made the case that in the coming decades, frequent boom-and-bust business cycles will once again be the norm, just like they have been for most of history.
“The fact we’ve only seen four U.S. recessions over the last four decades is very unusual, and one that’s unlikely to repeat without an enormous amount of good luck,” wrote economist Jim Reid, strategist Henry Allen, and analyst Galina Pozdnyakova.
The pessimistic prediction comes as officials at the Federal Reserve meet to strategize about how they’ll use monetary policy to bring the economy in for a “soft landing” from the recent period of high inflation and hopefully avoid an economic crash.
Economists at Deutsche Bank are among those who believe the Fed will fail, and we’ll have a recession in the next year. The paper released Monday, however, focuses on the long-term outlook rather than the question of whether a recession is currently on the horizon.
For as far back through history as there’s economic data to analyze, economies in all countries have generally followed a boom-and-bust cycle: a period of rapid growth, booming investment, and easy profits followed by a recession, widespread business failures, and job losses, as it all comes crashing down. Then a recovery occurs when the cycle starts all over again.
In the 1800s, when the economy depended heavily on the success of crops, this happened every two to three years, according to Deutsche Bank’s research.
Business bubbles, major wars, and even volcanic eruptions have all set off recessions. Starting with the foundation of the Federal Reserve in 1913, central banks have tried to tame those wild up-and-down swings of business and set economies on a course of steady economic growth, mainly by trying to restrain rapid inflation, which goes along with “boom” periods and typically foreshadows recessions.
Since 1982, central banks and governments have increasingly used expansionary monetary policy and deficit spending respectively to fend off recessions, flooding economies with money to stimulate spending and keep households and businesses afloat.
And by Reid’s analysis, it’s worked: Before 1982, U.S. economic expansions only lasted 2.8 years on average, and the economy was in a recession 35% of the time. But since 1982, the average U.S. expansion has lasted 8.6 years and the economy was in a recession only 8% of the time.
However, growing national debt in the U.S. and other countries could restrict their ability to use that strategy in future downturns. On top of that, the aging population means fewer workers, and more upward pressure on wages, which could stoke inflation—and recessions have often followed as a hangover to periods of high inflation, Reid noted.
While the report does live up to Deutsche Bank’s reputation for pessimism, Reid found a silver lining in the prospect of more frequent recessions: the “creative destruction” of economic downturns allowing faster economic growth in the long run.
“You could argue that they can lead to a more efficient allocation of resources since they tend to rid the economy of the excesses and bubbles of previous cycles, which leaves room for newer and more dynamic industries to grow,” he wrote. “Without recessions, the risk is that an inefficient allocation of resources builds up as weak performers and low-productivity sectors can hobble on in a way they wouldn’t if the cycle was left to its own devices without significant intervention.”