On both sides of the Atlantic, economies have remained remarkably resilient in recent months. As natural gas prices corrected and shortage risks eased, the eurozone appears to have avoided recession and is likely to recover again in the spring. While the Fed has raised rates by a total of 4.5 percentage points from March 2022 onwards, it appears poised to take another step of at least 25 basis points on March 22—hence our upward revision to our CAGR estimates in 2023 year from 0.0. % to 0.8% for the US and from -0.2% to 0.7% for the Eurozone, from the corresponding figures at the beginning of the year.

In the US, the latest monthly data is likely to exaggerate the resilience of the US economy. However, at its core, the data shows more stability than expected a few months ago. In many respects, the economic fundamentals remain favorable. Consumers can still generate significant excess savings, which accounted for almost 12% of their spending in the US in 2022. In Europe, where consumers have not yet used their deposits, this level exceeds 14%. Generally healthy household and business balance sheets, strong employment growth and continued fiscal support provide a cushion against the shocks of high inflation and tightening economic conditions. In addition, they can serve as a springboard for recovery when inflation subsides and its pace begins to stabilize.

Unusually stable initial conditions may be one reason why the US bond yield curve may now be overestimating the risk of a severe recession. However, this time around, it may take an extended period of higher short-term interest rates relative to longer-term bond yield prospects to sufficiently curb growth and curb inflation. But can the economy remain sustainable? Skeptics often point out that an inverted US Treasury yield curve almost always heralds a recession in the country. In the two cases in which the Fed’s rate hikes brought the economy to a soft landing rather than a bumpy one, in 1984 and 1995, the curve did not reverse. Will this time be an exception? Probably no. We fundamentally disagree with the yield curve and its message.

* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.