Are the recession alarm bells ringing?
13 April 2016
Standard Life Investments, the global asset manager, assesses whether the global economy is on course for recession and analyses the current stage of the business cycle. In April’s edition of Global Outlook, Jeremy Lawson, Chief Economist, says that a significant amount of financial stress has taken hold of the global economy particularly in the early part of 2016, further clouding the economic outlook. There is an evident split across different types of indicator; economic fundamentals are showing few signs of alarm, but bells are ringing more loudly in financial markets.
"The combination of sluggish growth and acute market turmoil has triggered fears that the global economy could be heading for recession, eight years after the global financial crisis. Whilst we have a number of tools and indicators we can use to understand the business cycle and the risks ahead, there is conflicting evidence.
"At first glance, economic variables such as current account balances, labour market slack and credit growth are showing characteristics that activity is more mid-cycle than late-cycle. In contrast, financial variables such as equity market values, credit spreads and the yield curve suggest that the cycle is maturing more quickly.
"The OECD's composite leading indicator is designed to provide early signs of turning points, and is currently signalling stable albeit subdued growth across the developed world, with a mixed outlook in emerging markets. More ominous signals are however coming from those recession probability models that are based on financial variables.
"Economists have a poor record of predicting recessions ahead of time, and equally, in raising false alarms. What we can say with confidence is that the global economy is not in a recession at present, while forward looking indicators point to continued growth through the spring outside of the commodity sector. Although we are seeing conflicting signals between economic and financial indicators, we do not see enough compelling evidence in the fundamentals to convince us that we are heading into recession this year. However, we need to monitor conditions very closely over the coming months for signs that we are too sanguine."