Polis

The economic conditions today differ greatly from those in 1980:

• In the 1980s, there was normal productivity growth, favorable demographics and low government debt. China's entry into the labor market led to a large supply of cheap labor on the global market and pushed down inflation rates. Countries such as the USA and Germany were able to raise interest rates to make saving more attractive and reduce inflation. These factors led to low inflation rates and persisted for over 40 years.
• Today, the conditions are different: productivity growth is close to zero, demographics are unfavorable, public debt is high and the private sector is heavily indebted. We are seeing a trend towards less democracy and more state control of the economy. This has a negative economic impact, particularly in terms of corruption and per capita income.
• The decision by countries such as China and Russia to abandon democracy and become pure dictatorships with state control of the economy is likely to have a negative impact on global economic growth.

Development

How a recession will manifest itself in the USA and Europe:

• There are signs that the USA could possibly enter a recession in winter or spring.
• The US central bank's forecast model, which estimates the probability of recession based on interest rate trends, currently stands at 67%, the second-highest figure since the 1980s.
• Every recession in the last 70 years in the USA has occurred when the unemployment rate has risen by more than 0.33 percentage points; the most recent increase is 0.4 percentage points.
• Over 50% of US banks have tightened their lending conditions due to the changed interest rate landscape, which has often been associated with recessions in the past.
• The mortgage interest rate in the USA has risen from 2.7% in 2021 to 7.2%, making real estate increasingly unaffordable and putting pressure on the real estate sector.

• Germany is already in a mild recession and the rest of the eurozone could soon follow suit.
• There are two important trends in the eurozone: real economic growth follows money supply growth with a twelve-month gap. The money supply is currently shrinking at record speed.
• The European Central Bank (ECB) has already made a mistake three times in the past by raising interest rates when the eurozone economy was already weakening.
• The eurozone is currently showing growth of around zero percent over the last four quarters and the ECB is again considering raising interest rates, which could push money supply growth further into negative territory and increase the risk of recession.
• Both the US Federal Reserve and the ECB know that they are taking a recession risk as inflation is rising slowly and may not be able to be brought down to the 2% target without a recession.

Investments

• Conservative basic bonds for German savers, such as government bonds, remain an unattractive form of investment due to low interest rates and expected inflation.
• Inflation-linked bonds could perform better, as expected inflation is likely to be higher than assumed by the capital market. They could perform around one percentage point better per year than normal government bonds.
• In the USA, interest rates have already risen to 4.3%, which makes them attractive. Inflation is below this level, meaning that US government bonds offer a low real return. In addition, the equity market could yield less, making government bonds more attractive.
• Gold is currently in high demand from central banks as it is seen as protection against inflation risks. This trend could continue, especially if government bonds appear less attractive compared to gold.
• For emerging markets, US government bonds are becoming increasingly risky due to political risks such as sanctions and account freezes, which could increase demand for gold as an alternative reserve currency.
• Residential real estate remains attractive, despite a slight fall in prices and current price stagnation. With the current low interest rates and expected inflation of 3.5 percent, the average rental yield of 3 percent offers an expected return of around 6.5 percent, which is very attractive compared to government bonds or cash.

Plateau:

• Avoiding the US equity market completely makes little sense, as the US central bank has reacted flexibly and wisely in times of crisis and will probably continue to take good measures in the future.
• The two global ETFs, which focus on consumer staples and healthcare stocks, have a significant proportion of US equities. However, this is not a problem, as these sectors in particular will be little affected in a recession.

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