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Why fears about a global recession have disappeared far too quickly

South China Morning Post

發布於 2019年12月13日00:12 • Nicholas Spiro
  • In a matter of months, markets have swung from pessimism about the global economy to optimism. But Europe’s economy remains weak and, with an impending presidential election, it is too soon to say if the US economy is out of the woods
Work continues on an outdoor observation deck on an office building in New York. In the US, fears of a recession have fallen dramatically since the summer. Photo: AP
Work continues on an outdoor observation deck on an office building in New York. In the US, fears of a recession have fallen dramatically since the summer. Photo: AP

Sentiment in financial markets is fickle at the best of times. Yet, the speed at which investors have changed their minds about the probability of a global recession in the coming year is striking.

As recently as August, a net 48 per cent of fund managers in Bank of America Merrill Lynch's survey expected global growth to weaken in the next 12 months, one of the most bearish outlooks since the 2008 financial crisis. By November, a net 6 per cent said they expected growth to improve.

While the survey is just a snapshot of sentiment and canvasses the views of only a small minority of market participants, its findings are a reference point for market commentary and analysis. Last month, Michael Hartnett, one of the authors of the survey, noted: "The bulls are back."

There is some evidence to validate the renewed optimism, particularly in the case of America's economy. In the US, Google searches for the word "recession" " which in August surged to the highest level since the Great Recession of 2008-9, as markets took fright at the intensification of the trade war and signs of a deepening slowdown " have fallen dramatically since the summer.

While this is partly attributable to mounting expectations that Washington and Beijing will strike a partial trade deal " or at least agree to delay new tariffs on about US$160 billion of Chinese imports that are set for December 15 " it also stems from a sense of relief in markets that America's economy is still in relatively good shape.

As I argued previously, the US consumer remains in good health. Data published last Friday revealed that the economy added 266,000 jobs last month, beating analysts' estimates by a wide margin and showing the extent to which fears of a recession were overblown.

The Federal Reserve, which took the controversial decision in October to halt its interest-rate-cutting campaign, has been proved right.

How the Fed is keeping the US dollar strong

Indeed, there are signs that growth elsewhere is starting to pick up. An index produced by IHS Market showed global manufacturing activity expanding in November, albeit modestly, for the first time in seven months. It suggests that the manufacturing downturn has finally bottomed out.

Still, there is plenty of other evidence that justify the concerns investors had during the summer. While those fears were overblown, they were still warranted, particularly in the case of Europe's weak economy.

Survey data on the euro zone published last week showed the bloc's manufacturing sector remaining deep in contraction territory. Even the more resilient service sector is on track for its weakest quarterly expansion since 2014, "hinting strongly that the slowdown continues to spread", IHS Markit chief business economist Chris Williamson warned.

While markets' confidence in the Fed has more or less been restored following its decision to cut interest rates pre-emptively to ward off the threat of a recession, the same cannot be said for investors' faith in the European Central Bank.

Christine Lagarde, the new president of the ECB, has her work cut out to convince markets that the euro zone is not succumbing to "Japanification". This is the term economists use to describe the anaemic growth, stagnant inflation and ultra-low bond yields Japan has suffered since the bursting of an asset price bubble in 1990.

Can China draw the right lessons from Japan's trade war with US?

According to market measures of future inflation in the euro zone, investors believe inflation will not exceed 1.2 per cent " significantly below the ECB's 2 per cent target " as far ahead as the second half of the next decade. What is more, practically all Germany's government bonds are currently trading at negative yields.

While the euro zone is not experiencing outright deflation yet, the parallels with Japan suggest that any green shoots of recovery in Europe should be treated with caution.

Even the optimism surrounding America's economy may be misplaced. Not only will US-China trade tensions persist " and, more likely than not, escalate again " irrespective of whether a preliminary deal is reached soon, US political risk is increasing sharply in the run-up to next year's crucial presidential election, and at a time when US equity valuations are stretched.

As JPMorgan rightly noted in a report published last Friday, US politics is "a classic wild card", with "a uniquely unpopular president facing a still unknown Democratic challenger".

As is the case in Britain, where the hard-left agenda of Labour leader Jeremy Corbyn is potentially a bigger threat than Brexit, the Democratic Party's increasing hostility to Wall Street could prove more damaging to stock markets than the trade war.

The pessimism about the global economy during the summer was excessive. However, it would be a mistake for investors to ignore many of the risks that gave rise to the bearishness in the first place.

Nicholas Spiro is a partner at Lauressa Advisory

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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