From Deutsche Bank, a More Bullish Scenario for U.S. Growth

Money under a magnifying glass
Money under a magnifying glass

The U.S. economy will produce stronger GDP growth than had been expected in 2011 as it bounces back from the Great Recession, analysts from Deutsche Bank (DB) said Tuesday. According to DB Managing Director and Chief Economist Peter Hooper, positive trends developing in consumer spending, employment and the stock market will likely offset negative pressures from the foreclosure crisis, declining home values, the sovereign debt crisis and the effects of escalating oil and commodity prices on consumers. The resulting will be growth higher than the 3% most analysts had previously predicted.

During a press briefing in New York on Tuesday, Hooper said the bank is predicting moderate GDP growth in the 3.5% range for 2011, but he also said growth could rise closer to 6% under the right circumstances. The change from a low-growth to a more moderate-growth recovery is likelier now that consumers have slashed personal debt and adjusted their household spending, which is expected to have a positive affect on corporate balance sheets and the economy overall.

A 23% Rise in Equities?

As household debt has dropped to 10% of consumers' income, they've begun spending more, unleashing pent-up demand for durable goods and other items. That spending is helping corporate earnings trend higher.

Consumers have also poured more money back into equities, boosting stock values and raising the net worth of many individuals. Deutsche Bank Chief U.S. Equity Strategist Binky Chadha is predicting a 23% rise in the stock market for 2011. As consumers continue to benefit from the rally in stocks, they'll stop hording cash.

The savings rate -- which peaked at about 6% last year -- has already been declining for the last six months, coming down closer to 5%, which suggests consumers are feeling more confident about the future. Add those trends to a projected increase in business spending this year and rosier projections about accelerating job growth, and the economic outlook for 2011 becomes even more optimistic.

"Consumers are coming to life," said Hooper. However, he noted, "It is still a subpar recovery, not the normal bounceback that happens when the economy suffers such a major downturn."

What Could Still Go Wrong

Unfortunately, there are plenty of risk factors that continue to cause major drags on the economy. Uncertainty over how the government will handle the federal budget deficit, the sovereign debt crisis in Europe, the ongoing U.S. foreclosure crisis and the possibility that several U.S. states could default on their debts could potentially stymie growth.

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Deutsche Bank Global Head of Rates Research Dominic Konstam also warned that because the largest banks have tightened their lending standards, and countries have begun looking at tightening monetary policies, there's a greater risk that "there may not be enough global liquidity for the global economy to continue growing." If capital markets freeze up again, it could lead to a global economic slowdown that would have a significant impact on U.S. exports, which have been expanding.

Higher commodity and oil prices could also provide a significant drag on the economic recovery this year. If businesses have to pay more for corn, soy beans, oil and other key raw materials, it could lead to higher food and energy prices, shocking consumers into a pullback on spending, which could in turn deal a major blow to the recovery.

Regardless of the negative factors, the overall upside potential for the economy appears greater than the downside, say Deutsche Bank analysts. The economy is on better footing, they assert, inflation is unlikely to be a problem and interest rate hikes from the Fed shouldn't occur until late 2011 at the earliest.

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