Why fears about a global recession have disappeared far too quickly
- 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
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.”
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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.
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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.
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”.
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