Economic leaders are currently looking to the past to find guidance on how to navigate the present economic climate. However, there is a lack of consensus on which past era should be studied. Deutsche Bank believes that the U.S. economy resembles the turbulent times of the 1970s, citing the war in Israel, oil shocks, and rampant inflation as reasons for this outlook. On the other hand, economists at the White House argue that the post-World War II inflationary period provides a better guide because they expect pent-up demand from the pandemic to eventually fade away. UBS disagrees with both views, suggesting that the 1990s more closely resemble the current economic climate being faced by world leaders.
UBS’s Chief Investment Office, led by Jason Draho, released a note questioning whether the 2020s would mirror the “roaring 20s” of a century ago. The note highlights that the 1920s saw rapid technological advancements, increased productivity, and the growth of major industries such as automotive, film, and chemicals. According to UBS, the data suggests that today’s economy has entered a new regime, with high levels of growth, inflation, and interest rates not seen since prior to the global financial crisis.
The note from UBS outlines that a potential “roaring 20s” scenario is possible, but it requires five key factors to be realized. These include containing inflation below 3%, widespread investment across the economy, a more dynamic post-pandemic economy, fading policy headwinds, and an increase in productivity. However, UBS believes that these factors are unlikely to materialize, and therefore points to the 1990s as a better template for navigating the rest of this decade.
Despite these proposals, Draho’s team acknowledges that the current state of the economy makes forecasting difficult. Many on Wall Street had anticipated a hard landing at the beginning of the year, which did not materialize. Instead, the U.S. experienced GDP growth of 4.9% in the third quarter of 2023, despite aggressive rate hikes by the Federal Reserve. The bond market also experienced uncertainty, with certain Treasury yields reaching 16-year highs before some investors, like Bill Ackman, made U-turns in response to the uncertain conditions.
The U.S. economy’s challenges have largely been driven by supply issues. For example, OPEC nations are producing less oil than at any time since August 2021, and both Saudi Arabia and Russia have reduced their oil production. China has also announced restrictions on the export of battery-grade graphite, which is essential for the production of electric vehicle batteries. UBS identifies supply chain problems, labor and housing shortages, and the need for new investment and technologies as ongoing supply issues.
UBS also highlights several other factors that could hinder a potential “roaring” 20s, including geopolitical conflicts, political dysfunction, a debt crisis, energy crises, climate disasters, and the possibility of artificial intelligence not meeting expectations.
Overall, while economic leaders are seeking inspiration from the past, there is no consensus on which era to study. However, UBS believes that the 1990s offer a better template for navigating the current economic climate, given the challenges and uncertainties faced by the global economy today.
