Economist highlights recession risk

Economist Jeremy Lawson says a significant amount of financial stress has taken hold of the global economy, particularly in early 2016, further clouding the economic outlook.

“The combination of sluggish growth and acute market turmoil has triggered fears that the global economy could be heading for recession, eight years after the global financial crisis,” Mr Lawson wrote In Standard Life Investments’ April edition of Global Outlook.

“Whilst we have a number of tools and indicators we can use to understand the business cycle and the risks ahead, there is conflicting evidence.”

Mr Lawson said there is an evident split in economic and financial variables, with economic variables showing fewer signs of alarm while financial variables have alarm bells ringing more loudly.

“At first glance, economic variables such as current account balances, labour market slack and credit growth are showing characteristics that activity is more mid-cycle than late cycle. In contrast, financial variables such as equity market values, credit spreads and the yield curve suggest that the cycle is maturing more quickly,” he said.

“The OECD’s (Organisation for Economic Co-operation and Development) composite leading indicator is designed to provide early signs of turning points, and is currently signalling stable, albeit subdued, growth across the developed world, with a mixed outlook in emerging markets.

“More ominous signals are, however, coming from those recession probability models that are based on financial variables.”

Mr Lawson warned that the broader financial market needs to be cautious of predictions of recessions ahead of time as it can often raise false alarms.

“What we can say with confidence is that the global economy is not in a recession at present, while forward-looking indicators point to continued growth through the spring outside of the commodity sector,” he said.

“Although we are seeing conflicting signals between economic and financial indicators, we do not see enough compelling evidence in the fundamentals to convince us that we are heading into recession this year.

“However, we need to monitor conditions very closely over the coming months for signs that we are too sanguine.”

[Related: IMF downgrades global growth]