INSUBCONTINENT EXCLUSIVE:
With US treasury curve flattening to 20 bp spread after last Fed rate hike to 2.5 per cent for Overnight-10 year yield, and latest data
prints signalling weakness on manufacturing side, markets are abuzz with a heightened perception that US economy could be going into
But, is there any real threat of a looming US recession Probably not
While many have scaled down growth estimates for 2019, with expectation for a sharp deceleration in H2, most estimates for 2019 are above 2
above estimated potential growth of 2 per cent
This cannot be considered recessionary.
Increased traction in expectations for a recession has added fuel to view that Fed might have
tightened more than needed, which looks strange given that real Fed rate is just 0.5 per cent, Fed balance sheet is still in excess of $4
trillion despite small rundown over last year, and most financial condition indicators are at comfortable levels
However, keeping aside market debates, estimated probability of a US recession is far lesser
In fact, anxiety levels are far lower broadly
For instance, Google trend charts show worldwide searches on US recession were much higher in 2004 when Fed decided to lift off from earlier
The estimated probability of a recession went to a high of 11 per cent in September 2005, as per Fed estimates
But, in retrospect, we know that it was a false signal
While 2008 GFC was indeed characterized by higher probability of a recession (100 per cent) and coincidental high global anxiety seen in
Google searches (100 per cent), there have been several occasions after 2008 when markets were worried about perceived recessions
For example, amid PIIGS crisis in 2011, after Bernanke announcing Fed tapering in May 2013, and during decline in crude prices in 2014-16
In current scenario, market perception of a recession is fuelled by a host of factors, including fading impact of fiscal stimulus in 2019,
trade conflicts with China and Fed rate normalisation
These perceptions are also fed by concerns about late cycle syndrome
Ironically, while there is certainly a possibility of some growth softening in US, persistent tightness in US labour market (now also
visible in Europe and emerging in Japan), positive output gap, narrowing spare capacity and strong household conditions indicate that
situation is far from conditions that forebode a recession
On contrary, decline in crude prices can boost household consumption by enhancing real income
Note that during 2014-15, real personal consumption growth had improved to 3-4 per cent following a decline in fuel prices.
Hence,
perception in financial markets of a looming US recession is in sharp contrast with low anxiety in wider economy or estimated probability of
0.13 per cent, on average, during 2018
In our view, there is a fair chance that markets (and also Trump) may be considerably overstating recessionary concerns to push Fed into
abandoning its normalisation path and turn dovish
As of now, it appears that Fed is not playing ball with either of them.
