Recession, the taboo word for 2019 forecasts

There will be no recession in 2019, not in the United States or in Europe. This is the message most investment firms have stressed in the presentation of their forecasts for the next year. The general consensus is that, economically, things will continue on track - although they will slow down moderately - and that should end up being reflected in the stock markets.

"The probability of a global recession is of 10%." This was practically the first idea launched by Rosa Duce, chief economist of Deutsche Bank in Spain, in the presentation of the bank's forecast this week.

"The economy is going to grow above 3.5% in 2019," she added almost immediately, emphasising that this level is above the expansion barrier.

For Deutsche, it is "surprising" what can be observed when contrasting the global economic situation with the behaviour of stock markets, as equities are not reflecting, in the economist’s opinion, a positive macroeconomic evolution. "It's very surprising, October's falls are inexplicable if we look at macro and business data," says Duce. "The stock exchanges have not reflected the macro and business data so far," she stresses.

The German bank sees no risk of recession in the United States (even after the last change of heart from Jerome Powell regarding rate hikes) or in Europe (it recognises that the environment is more complicated and estimates that the economy will advance 1.6% in 2019).

THEY ARE NOT THE ONLY ONES

But experts at Deutsche Bank are by no means the only ones to rule out a recession for next year. Analysts at Allianz believe the US economy for example will experience a "slowdown", but without recession.

"The US economy will slow down after the effects of President Trump's tax cuts disappear, but a divided Congress does not have to significantly alter its economic policy, a recession in the United States is not yet expected," the analysts said.

This autumn a common pattern has appeared across several types of assets. Equities have fallen, with cyclical values ​​being especially affected, credit spreads widened, commodity prices have suffered pressures and inflation expectations have fallen. All in all, the market’s message seemed to indicate that a recession is 'just around the corner'.

However, analysts insist on good economic forecasts, which estimate somewhat slower growth rates but remain at levels above potential growth. "We could face a more substantial slowdown, but not a recession," DWS insists.

Mirabaud, on the other hand, talks about a probability of a "low" recession in the United States in the next 12 months, while the S&P credit agency, although it has recently raised its estimates that the country will go into recession in the next twelve months, keeps them at low levels between 15-20%, up from the previous 10-15%.

"After several weeks in which the market has been extremely worried about Brexit, the Italian deficit and the trade war, the tone of recent days has been more positive, although there has been no significant progress on any of these fronts, investors will probably have realised that the market fund is attractive, that valuations are attractive and that we can speak of economic slowdown, but in no case of recession," says another expert consulted by Spanish media outlet Bolsamania, part of the WebFG group.

In this sense, David Levy, general and investment director at DiverInvest, admits in his latest monthly letter that, today, it seems that everything is going downhill, “the US in recession, Europe will disappear, the Chinese are once again just another Asian country ... there are doubts about everything, the selling trend sweeps in and there are only falls".

"I do not agree," he adds bluntly. "The reality is that the world continues to grow at rates of 3%, the profits of companies to 6% and, despite the slowdown, nothing seems to have changed significantly."

Analysts at Rabobank in London said the trigger for the equity sell-off was, rather than a fear of a recession, a sharp bear-steepening in the US Treasuries market in early October, which was the product of a the shock reassessment of Federal Reserve chief Jerome Powell surprising the market by noting in a TV interview on that the central bank was “a long way” from neutral.

This led to yields being pushed up "for all the wrong reasons", Rabobank said, meaning pricing-in more uncertainty rather than optimism on the growth front, which put the Wall Street rally into reverse.

The US yield curve has continued to flatten and move towards inversion, leading to further large falls in stocks this week, and Rabobank said at the current rate of flattening "could be in what is traditional recession warning territory by the end of the week, let alone by Xmas". The Dutch bank's Fed expert Philip Marey noted on Tuesday that there is already a "47% risk of a US recession in 2020 based on the yield curve", and it may be over 50% now, "in which case one needs to start pencilling in the [possibility] of a US, and thus global, economic downturn within 18 months".