Probability of a recession in next three years has increased

This article is part of
Spring Investment Monitor – March 2016

Probability of a recession in next three years has increased

Global markets have experienced a turbulent start to the year. China’s slowing economic growth, whipsawing commodity prices and geopolitical tensions in Europe in particular have proved a toxic combination for investors, meaning sentiment has stayed negative.

The US Federal Reserve may have raised its interest rate back in December, but already there are those who believe Janet Yellen will have to rein in the number of further rate hikes this year, or even backtrack entirely as a possible recession in the US looms.

Much seemingly depends on China and whether it can maintain a steady growth path.

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The International Monetary Fund’s (IMF) global growth projections were revised downwards at the start of this year by 0.2 percentage points to 3.4 per cent for 2016, rising to 3.6 per cent for 2017.

Pictet Asset Management chief strategist Luca Paolini observes: “Investor sentiment remains fragile thanks to some uninspiring economic data from the US, Europe and Japan. We believe a US recession is off the cards – our central scenario remains one of continued, albeit slower, growth underpinned by a steady improvement in economic conditions in China.”

Mr Paolini forecasts economic expansion in China this year of 6.7 per cent, slightly ahead of the IMF’s prediction of 6.3 per cent, which it expects to drop to 6 per cent in 2017.

Mike Bell, global market strategist at JPMorgan Asset Management, says fears are mounting over whether there will be a significant drop in the Chinese renminbi this year.

He notes: “Whenever you get a very small move in the Chinese currency against the dollar, people are worried that’s the start of a much bigger move. But our view is that it’s unlikely and you’ll probably see a very gradual and relatively mild further depreciation of [the renminbi] and not the big 20 per cent devaluation people are scared about.

“But we do think movements in the Chinese currency are likely to be a continued source of volatility this year, even though they will eventually prove to be unfounded fears.”

Meanwhile, in the US there are concerns the country is heading towards a recession based on certain economic indicators.

Mr Bell explains: “We think that looking forward on a longer-term view the probability of a recession sometime in the next three years or so has increased. That’s because the unemployment rate is very low and generally that means you’re closer to the end of the economic cycle than you are to the beginning.”

But he believes the chances of a recession this year remain low as US job growth looks healthy.

Schroders chief economist Keith Wade is not forecasting a recession either, but says: “We now expect the next rate rise in June as weaker global growth and the recent tightening of financial conditions cause the Fed to delay in March.”