CFA Society Singapore
SINGAPORE (Mar 25): The global economy may continue to slow down in the near term but the world will probably dodge a recession this year unless it is hit by big shocks or serious policy errors, says Oxford Economics.
Since 1980, Oxford Economics says there have been eight significant global slowdowns in which world growth has decelerated below its long-term average of 2.9%.
But of the eight slowdowns, four ended up turning into recessions but the two most recent global soft patches of 2011-12 and 2015-16 did not.
While the global cyclical position looks broadly similar to the last two slowdowns, a key difference this time around is a significantly greater degree of monetary tightening.
“US rates were unchanged or nearly so in 2011-12 and 2015-16 but have now risen by a cumulative 225bps from their trough,” says Oxford Economics’ lead economist Adam Slater in its Friday report.
However, the recent Fed hiking cycle has not been accompanied by similar cycles in the other major advanced economies. This is a key difference from past tightening periods and reduces the danger to global growth, says Slater.
Meanwhile, other key recession drivers are looking less worrisome.
“Inflation in the advanced economies looks subdued, limiting the danger of more monetary tightening and even opening the way for policy to be relaxed... Core inflation in the US and China is steady at around 2% and is below 1% in the eurozone and Japan. US non-petroleum import prices – a decent proxy for global traded goods prices – are declining,” says Slaters.
And while Emerging Markets (EM) last year suffered external shocks similar to those in 2014-15, the recent incidence of crises is much lower than that associated with world recessions and lower also than in 1997-98 when EM distress was very severe but a world recession was avoided.
One factor behind the recent global slowdown has been the rise in oil prices in 2017 and 2018 where prices rose by around 50% in the year to 2Q18. But oil price rise has now tailed off and was not nearly as large as before past recessions, says Slater.
The impact of oil prices may also be more ambiguous than in the past due to the rise of US shale production; steep falls in oil prices in 2014-15 were a key factor in the last world slowdown, he adds.
In addition, although financial markets have seen a number of periods of significant volatility in the last 18 months, a market rally in recent weeks has reversed much of the prior decline. In fact, with global house prices still rising, albeit more slowly, there is an absence of negative wealth effects that could deepen the current downturn, says the economist.
Lastly, Slater says the current slowdown shares some features with past recessionary 100 periods although most of these potential recession “triggers” look somewhat less severe.
“We do not think there is enough negative momentum to make a slide into recession this year likely. This would require additional serious shocks or major policy errors,” says Slater, adding that one possible risk area is asset markets, where valuations remain high which could lead to higher sensitivity to policy errors such as additional monetary tightening.