As leading stock markets erase their 2016 losses, was panic about recession earlier in the year absurd?
Mick Grady, senior economist and strategist at Aviva Investors, says Yes.
“I think it’s a myth that expansions die of old age”, said Federal Reserve chair Janet Yellen in December last year when asked if the US was likely to see a recession in the near term. And yet soon after that, fears of US recession gained increasing traction. At the same time, US payroll growth was rising at a faster pace than it had done on average over the past five years – hardly indicative of an economy heading into recession. The fears of recession were never grounded in economic data, but rather were a reflection of negative market sentiment spilling over into the real economy. But as the renowned US economist Paul Samuelson said back in 1966, the stock market has predicted nine of the past five recessions. The economic fundamentals remain robust in the US, underpinned by strong employment, real disposable income growth and associated consumer spending. Risks remain from weaker growth in the manufacturing and energy sectors, but spillovers from those sectors are likely to be contained.
Colin McLean, managing director of SVM Asset Management, says No.
Markets have rebounded sharply from their February lows, but there are no grounds for complacency. Global growth is challenged, with fewer options remaining to boost demand. The fears that drove the selloff are likely to re-emerge. Headlines are focused on China’s slowdown and commodity weakness, but there are deeper problems. Global disinflation and the failure of central bank policies are major forces that will persist. Investors are beginning to question what remaining tools central banks have. Money printing, negative interest rates and currency devaluations have been exhausted. They have failed to generate the inflation that is needed to work off the global debt burden. And consumer demand remains anaemic in most economies. Weak wage growth globally seems driven by inadequate and ineffective capital investment. Recent volatility points to the need for some investors to change strategy; recognising sector rotations, and reducing exposure to sectors that depend on inflation. Economic data in recent months points to the growing risk of recession.