Fears of a US recession in 2016 are overdone and investors should expect another boring, volatile year.
This is the view of James Carrick, economist at Legal & General Investment Management, who told Investment Adviser’s Julia Faurschou: “I think US growth is going to be below trend this year and it is going to be disappointing but fears of a recession are overdone.”
However, he also said that any ideas the economy might accelerate after the problems with the weakness in oil capex are over were too optimistic. “So the idea the Federal Reserve can raise interest rates rapidly is wrong and the idea that the US government might head into QE4 is wrong.
“It is just going to be another boring, volatile year for markets.”
Mr Carrick said the key driver that might push the US into a recession would be a credit crunch, although banks suggest that credit conditions are easing.
However he asked: “Are these the right people to ask these days?”
He explained that corporates have not borrowed from banks, as these have been repairing their balance sheets. Instead, corporates have borrowed from capital markets, and the capital markets have been showing signs of stress, he said.
There will be defaults in the energy space and energy explorers and therefore investors who have been burned in that space may not lend to other, good companies.
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This is, he said, the “definition of a credit crunch”, with good companies in the US not being able to get financing, especially with a widening of spreads in credit markets, he explained.
“I believe we already have a credit crunch in emerging markets and it is debatable how severe the problem is for US corporate credit markets”, Mr Carrick said.
Fears of a slowdown could be one of the reasons why the Fed seems to have changed the way it is acting, having previously raised rates every quarter, and seems to be adopting a more “wait and see” or “stop-go” attitude, he said.
“As fears of quality tightening fade, markets rally and so we could see a cycle of confidence and fear, confidence and fear.” This is why investors won’t see markets move strongly in either direction, he added.
Yet Mr Carrick said things are different now to the situation in the recent financial crisis. He said: “Policymakers back in the 2008 credit crisis were damned if they do, damned if they didn’t.
“Today, yes, there is too much borrowing, and there is the danger of a credit crunch but there is no inflation threat so central banks are not on auto-pilot and they can react, so that’s why markets have been so volatile over the past year and why policymakers are umming and ahhing about what they are going to do.”
