Quick Bites | Global Economy Remains in Reasonable Health

Over the past few weeks, the narrative dominating investment markets has switched from the joys and wonders of Artificial Intelligence and the expected central bank rate cuts to … bubble-high valuations and the risks of global recession.

The US benchmark index, the S&P 500, has fallen 8% from its peak, the Nasdaq is down 10%, while Germany, France and the UK have seen market values under significant selling pressure. Japan has been the worst performer, down 12% in a single day, and off 20% in a matter of 3 days – something not seen since the 1987 Crash. China’s market has been falling since May. Fortunately, the ASX has remained relatively resilient.

What’s going on? Is the global economy heading for a recession? Is the much anticipated “soft landing” turning into a hard landing?

Heightened volatility over the past few weeks have likely been driven by a combination of factors including the unwind of leverage in the financial system as the “carry trade” in Japan ended when the Bank of Japan (BoJ) raised interest rates by 0.25%, coupled with investors taking profits in mega cap technology companies.

Does this mean the global economy is heading for a recession? The short answer is “not likely”. No one knows the future with any certainty, but the elevated fears of the last couple weeks in our view seem over-blown when analysing the underlying health of global economic data and not that unusual in the context of an ageing bull-market.

While we acknowledge that the risk of a recession has increased and that the outlook for economic growth is slowing, it importantly has not fallen off a cliff nor indicating a global recession is imminent. Globally unemployment rates remain relatively low, inflation is heading lower (albeit taking longer than anticipated), central banks are cutting rates (or are expected to cut rates), while corporate earnings and their outlooks remain robust.

Source: The Economist