Deutsche Bank AG, one of the first Wall Street banks to forecast a U.S. recession, has retracted its prediction almost two years later.

What Happened: The bank's economists, led by Matthew Luzzetti, acknowledged the robust 2023 economy, with inflation nearing the Federal Reserve's 2% target and a resilient labor market, reported Bloomberg on Tuesday. They also noted that the easier financial conditions have minimized the downside risk to growth.

"We now think the economy will land on this narrow path and that a recession will be averted with limited cost in the labor market," the report said.

"Although inflation could firm some in the near-term, we ultimately believe it is sustainably falling towards the Fed's target."

This shift in stance represents a significant departure from the bank's initial prediction in April 2022, following the Fed's aggressive interest rate hike. At that time, the bank anticipated a "significant recession" by late 2023, triggered by a Fed funds rate rise to 5-6%, which would raise the unemployment rate by "several percentage points."

Despite reaching these interest rates, the unemployment rate remained at 3.7% in the previous month, the same as in April 2022. The bank began to retract its initial forecast in the middle of last year, with Vice Chair of Research Peter Hooper suggesting it was uncertain whether the U.S. would enter a recession.

Why It Matters: The reversal of Deutsche Bank's recession prediction is a significant development, given the widespread anticipation of a recession in 2024. In December, BMO Capital Markets and Deutsche Bank were among the most optimistic firms forecasting a recession in the U.S. economy by the end of 2024. Their prediction also included a 12% rise in the S&P 500 to 5,100, driven by earnings rather than rate cuts.

However, in February, economist David Rosenberg reiterated his forecast of an impending recession, pointing to a data point in the UPS earnings report. The economy has shown strong growth since recovering from the COVID-19-induced downturn in 2021, but some economists have continued to sound recession warnings.

Despite this, the strength of the labor market has consistently surprised economists, leading to a delay or reversal of recession predictions.