Recession? What Recession?

Friday, August 30, 2019
Recession? What Recession?

Written by Hudson Adviser Michal Park

Recession? What recession?

The longest expansion in US economic history is now being threatened by escalating trade tensions causing havoc amongst sharemarkets globally.  On top of the trade war, we’ve got Brexit, which is another political decision resulting in huge global change.  But is the current sharemarket downturn a sign of a major bear market, or simply a correction?

There is no question that global growth has slowed.  Below shows US economic growth over the past three years – lately, not able to meet the peak reached in mid 2018 due to the ongoing tariff threats:


AMP chief economist, Dr Shane Oliver, does not feel a recession is on the cards.  Yes, there are risks -  the most obvious being trade wars and recent inverted yield curves.  History shows that US presidents get re-elected after a first term except when there were recessions in the two years before the election and unemployment is rising.  Trump is aware of this and would be starting to panic about getting a deal done with China in terms of trade.               

Regarding inverted yield curves, they are not a reliable indicator of recession, merely a warning sign – though when found to be correct, a recession usually presented 18-24 months out. The Wall Street Journal reported in mid August that “the yield curve is no longer a reliable predictor, and other economic indicators are strong…the curve was flat for most of the 1990s, and even inverted briefly in 1998 without a recession” (switzer.com.au)

In Australia, inverted yield curves in 1985, 2000, 2005-2008 and 2012 meant nothing. 

US equity strategist at Credit Suisse, Jonathan Golub reported that in the 18 months following an inversion, the market rallies more than 15% on average.

Again in Australia, Shane Oliver’s reasons that our 28 years of continual expansion will avoid recession include the fact that there has been:

·         no excessive optimism,

·         no surge in debt,

·         no excess in the economy (apart from real estate – but essentially no investment boom),

·         modest private sector growth,

·         low inflation (so central banks have not slammed the brakes on).

In addition, our economy has seen:

·         Infrastructure spending,

·         Continued solid demand for exports,

·         Business investment turning the corner to offset a downturn in housing construction.

So it’s actually not all doom and gloom out there.

To finish on an even more upbeat note, chief economist at Morgans, Michael Knox, predicts that “in 2019 and 2020, Australia will grow twice as fast as the Euro area, twice as fast as Japan and faster than the USA”.  And with cash and bonds providing no returns, there may just be more inflows into shares.

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