The Strategist

UBS Securities, J.P.Morgan: No danger of global recession in 2019

12/10/2018 - 11:48

Investor concerns about prospects for a recession in the developed world are increasing. However, many economic models do not indicate likelihood of such a development.

upyernoz via flickr
upyernoz via flickr
Economists at UBS Securities studied 120 economic downturns in 40 countries over the past 40 years to understand how economies behave before a recession, for example, what happens to consumer spending, housing prices, bank lending, imports, productivity, and employment.

"We came to the conclusion that in a number of areas, the behavior of data for the last four quarters in the United States, the Eurozone and Japan does not correspond to any of recessions that have occurred since 1980," UBS said in the report.

For example, productivity and consumer spending increases tend to slow down before the recession begins. In the US, both indicators are accelerating. Thus, spending of Americans, taking into account inflation, rose in October by 2.9% compared with the same month a year earlier. This is above average growth of 2.4% over the past four years. The rates of increase in labor productivity in the second and third quarters were among the best in the last economic cycle.

Employment is high in Japan, and investment in the Eurozone is increasing, which is also not characteristic of the pre-recession period.

Those states, which show signs of a possible recession, have some specific reasons for this. In particular, it is the opposition of the government to the European Union because of the budget in Italy, which frightened investors and increased the cost of borrowing the country. The Bank of England warned that the indiscriminate departure of business from the UK in the event of the country's withdrawal from the European Union without an agreement could lead to a decrease in GDP in 2019.

Economists from J.P.Morgan made similar conclusions regarding the growth prospects of the global economy. They created several warning systems of impending recession. One of them, which takes into account only statistical indicators, estimates the probability of a recession in the United States in the next twelve months at 21% - below the levels recorded in 2016. The indicator, calculation of which includes the behavior of the financial market (changes in stock prices and long-term government bond yields), predicts a recession probability of 36%.

As J.P.Morgan Chief Economist Bruce Kasman stated in an interview with The Wall Street Journal, there is a high risk of recession in the perspective of three to four years, but in the coming year the likelihood of such a development is low.