The threat of a global recession has loomed on the investment horizon for some time, positive signs are beginning to emerge although the outlook for UK investors might not be so optimistic.
The recent Bank of America Merrill Lynch Global Fund Manager Survey revealed a sharp improvement in growth expectations for the global economy.
The survey – which questioned 178 participants overseeing $574bn in assets – moved from more managers expecting conditions to deteriorate in the coming 12 months in October to a net percentage expecting growth over the coming year.
Source: BofA ML Global Fund Manager Survey
GAM Investments fund manager Charles Hepworth said that after more gloomy outlooks recently, an immediate global recession now looks unlikely.
“Our view is that while certain markets might arguably have recessionary attributes, a global recession is unlikely to occur this year,” Hepworth said. “The US economy remains strong, even as key European economies are in contradictory phases.”
The multi-asset manager said that globally central banks are “treading a fine line of avoiding investor panic” moving to act when necessary.
“We have seen stimulus packages in the US and across Europe, as both the Federal Reserve and the European Central Bank utilise quantitative easing to aid their respective economies,” he said.
Action by central banks recently include the Fed’s reversal of its rate-hiking programme and series of cuts in recent months.
“After some miscommunications about its level of commitment earlier in the year, the Fed’s recent rate cuts and communications show that policymakers are now willing to ease enough to avoid a recession, at least in the near term,” said T. Rowe Price portfolio manager Christopher Brown.
“In another measure that reassured markets, the central bank has taken steps to deal with the recent unusual overnight lending rate spikes, buying $60bn of Treasury bills per month into the second quarter of 2020 to bolster reserves and offering overnight and term repo through at least January 2020.
“Global financial conditions have eased, and some leading economic indicators have turned positive.”
In addition, Brown said that the volatile US-China trade conflict that has dominated concerns among investors for some time now seems resolvable.
“The volatile US‑China trade conflict has been weighing on corporate capital expenditure for about the last 12 months, dampening economic growth,” he said. “The recent de‑escalation in tensions, though possibly temporary, follows conciliatory measures from both countries in mid‑October.
“This has given markets some confidence that the US and China can avoid the worst‑case scenario of an all‑out, extended trade war.”
As such, Brown said the T. Rowe Price economists have expressed “high conviction that global economic growth will rebound over the next few quarters”.
“This forecast appears to run counter to the current market consensus outlook which is still quite negative,” he added.
But not all is rosy, according Brown, who warned that its outlook could change dependent on existing major uncertainties, including an escalation in US-China hostilities, the inability of the Fed to shore up the US economy, and a lack of resolve by Chinese authorities to deploy reserves to boost its economy.
One area of concern for Hepworth is the UK economy, which narrowly avoided falling into technical recession – two consecutive quarters of negative growth – during Q3 after posting a low GDP growth figure of 0.3 per cent.
“With Brexit looming and all its attendant uncertainty, recession could be a very real possibility for the UK,” said the multi-asset specialist.
Given that the last recession was in 2008-2009 and a normal business cycle lasts 4.7 years, Hepworth argued that one could be overdue.
“We can look to the floundering services industry as a key indicator of the current economic state,” which Hepworth said represents around 80 per cent of the UK economy.
“Given the current political environment, it seems corporates are unwilling to make significant investment decisions given the lack of clarity around Brexit and the potential for restrictions on imports and exports.
“The overall uncertainty surrounding Brexit and the UK’s relationship with Europe has also contributed to falls in domestic construction and manufacturing sectors.”
Quarter-on-quarter UK GDP growth since March 2008
Source: Office for National Statistics
Melanie Baker, senior economist at Royal London Asset Management said that GDP grew at a fairly weak pace by UK standards and recent business surveys looked consisted with a slower pace of growth.
The small rise in GDP growth in Q3 was largely attributed to consumer spending “ticking along”, according to Baker, while government spending also rose.
“Exports were unexpectedly strong following a particularly weak Q2, reflecting machinery, transport equipment and chemicals and strong growth in ‘other’ business services,” she said. “That might reflect some front loading of activity ahead of the 31 October deadline.
“Additional government spending is boosting growth prospects, but the outlook for the UK economy remains Brexit dependent and uncertainty on several fronts is dragging on growth in the meantime.”
Hepworth concluded: “The international climate is ambiguous. But we believe that the UK is the primary economy at immediate risk of entering a recession. The world’s largest economies have remained strong so far, in particular the powerhouse US.
“The UK, on the other hand, has the particular issue of the Brexit paralysis. Consumers have become more risk averse, while businesses are reluctant to invest heavily when surrounded by such ambiguity lack of clarity over the outcome.”