Many investment professionals have seen a recession on the horizon since 2017. Those who have no economic arguments simply say that this cycle is over 10 years and that it is the longest cycle since WW2. They try to look for their luck with statistics, by stating that the good old rule of mean to reversion will bring us a recession in the next months. Even such respected organisations like the IMF started to get nervous about a recession late in 2017. Recently potential global trade wars have accelerated to nurture these fears of a global slow-down. At the end of 2018, a model from economists at JPMorgan Chase had put the chances of a recession within 12 months to 65%.
Despite many sources of economic excesses (especially debt), the US has weathered well the storm. The first quarter GDP growth was 3.2%, a strong number. The Atlanta FED GDPNow forecast for the second quarter is much weaker: currently the expectations are around 1.7% for the second quarter of GDP Growth. The yield curve is inverted, which was a clear sign for a recession, at least in the past.
Will we finally see a recession in the making?
William Buiter, economic Adviser at Citigroup points out that the four global recessions since 1961 have been triggered either by adverse supply shocks (say oil shocks) or by financial implosions:
Although there are risks of a significant oil price hike, or a sustained and/or intensified trade war that would lead to global financial implosion, we do not regard either of these risks as either imminent or systemic… The fact that global rates are still extremely low have some positive and negative angles. Implosions in a low interest environment with rates staying low (see last communication by the FED) are hard to come by in this environment. Certainly, a hike in rates will have a negative impact on the excesses in corporate debt. However, a recent statement from the FED chairman speaks about slowing price growth. The FT writes that inflation readings have been bafflingly weak, with the FED´s favoured measure of core price growth decelerating to 1.6% in March even as unemployment set an almost 50-year low of 3.6% in April. The FED has essentially abandoned any effort to predict whether the next move will be up or down. UBS mentions that credit conditions are now at their loosest since 1994 according to the Chicago FED´s index
Certainly, there will not be an implosion in prices of corporate debt, although bond markets seem to conclude that a slow-down is upon us.
So, what about trade fears?
Here William Buiter has as well an answer: Geopolitical risks appear less likely to become systemic-thanks to changing commodity supply dynamics. Political and policy uncertainty affecting trade, sanctions, regulation and the strength and independence of institutions is generating increased political turbulence, with modest and episodic effects on financial markets and the business environment, but limited impact on the global economy
Lower inflation, decelerating growth might look like a recession is looming…However we do not see any financial implosion nor any oil shock for a global recession to take place. In contrary, nearly 76% of the companies in the S&P 500 have reported higher than expected profitability for the first quarter 2019. True there was an overall earnings decline of some 0.8%. But an earnings decline of a mild recession is more about 20%. Looking at future quarters, analysts expect a decline in earnings in the second quarter, low single-digit earnings growth in the third quarter, and high single-digit earnings growth in the fourth quarter.
Yes, we will have a slowdown – we might be in the middle of it- but we do not predict a global recession, not for the next 12 months.