Chances of recession picking up

  • Business
  • Monday, 17 Feb 2020

WITH the economic fallout mounting from the daily surge in coronavirus (Covid-19) cases, the probability of recession that had been pushed back, has picked up.

Amid record breaking US markets, a silent alarm has gone off again, the inverted yield curve, where long term bonds see their returns fall below those of a shorter duration as investors rush for safe havens.

Historically, that has preceded a recession.

Using the Treasury bond yield spread, the New York Federal Reserve puts a 37% chance of a recession by July.

The latest from Bloomberg Economics which looks at December data, puts the probability of recession at 28% compared with 25% in November.

Pictet Asset Management multi-asset manager, Julien Bittell, expects a recession by the fourth quarter of 2020.

Most economists see a 25% chance of recession but equity markets, only 2%.

About 94% of last year’s rally was driven by a vigorous rise in prices, not a recovery in earnings as growth is slowing, said Bittel, as quoted by CCN.

Some indicators are not looking good. The JOLTS job openings, which measures US job vacancies, is at the lowest since the 2008 financial crisis.

The drop in job openings arguably occurs ahead of layoffs; a similar drop was noticed before the recessions in 2001 and 2008, said Inter-Pacific Securities head of research Pong Teng Siew.

US sales of electronics has been declining since mid-2018, and is still sliding.

But amid funding calm, the Federal Reserve’s more-than-expected withdrawal of liquidity is a sign of confidence in the US economy.The Fed narrative is certainly that of no recession. Several recession indicators have eased off, but others remain on course, said Pong.

For the sixth month, US consumer spending slowed in January, sales at clothing stores declined the most since 2009.

Retail sales for December was revised to show a 0.2% gain instead of 0.5% as reported earlier.

Excluding automobiles, gasoline, building materials and food services, retail sales was flat in January.

Industrial production dropped for a second straight month, unusually mild weather had lowered demand for utilities, while Boeing suspended production of 737 MAX planes.

Total US industrial production fell 0.3% in January following a 0.4% drop in December.

US manufacturing production fell 0.8% year-on-year in January, after a decline of 1.3% in December, representing the seventh month of contraction.

Total industrial capacity in use fell to 76.8% in January, from 77.1% in December, at a rate that is 3.0 percentage points below its long run average.

A slowdown in global growth will first be felt before a recession occurs.

China is the workshop of the world.

If the virus seriously disrupts Chinese production, its impact on the US economy would be an “extreme version of Trump’s trade war”, minus compensation in the form of trade revenue, said Professor at the City University of New York Graduate Center, Paul Krugman.

Krugman, writing in his New York Times opinion piece, has labelled the trade war as an economic bust.

Global growth this year may not be as strong as currently anticipated at 3.3%, as projected by the International Monetary Fund, said Malaysian Rating Corp associate director, economic research division Nor Zahidi Alias.

In any case, the global economy is expected to experience just a mild rebound due to the performance of developing economies, said Zahidi, adding that the effects of Covid-19 would likely ripple through the US economy which may also face slower growth.

Hedge fund honcho Ray Dalio thinks market impact from Covid-19 will be minimal. In a year or two, it will be “well beyond what everyone will be talking about.”

Initial fears had highlighted the Spanish flu in 1918, which killed 50 million people.

Goldman Sachs says the impact from Covid-19 would be limited and investors should buy cyclical and value stocks.

There may be a smaller risk to Chinese manufacturing than feared, as manufacturing facilities in Hubei are limited while the biggest industries, auto and healthcare, are not very time sensitive, according to JP Morgan.

Potential damage to consumer sentiment is key. Inflation in China soared in January while home sales plunged in the first week of February.

Moody’s also warns of the impact on regional economies as asset quality and profitability of banks may be hurt from exposure to businesses that are dependent on domestic spending, suppliers on orders from major technology or auto companies, commodity companies, mortgages and real estate and falling prices of financial assets. But RHB Research Institute chief Asean economist Peck Boon Soon would not rush into a recession scenario yet as the crisis is expected to ease off beginning April.

Columnist Yap Leng Kuen sees the next few months as crucial as China moves to contain the virus. The views expressed here are the writer’s own.

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