The inversion of the US yield curve has stoked fears of an economic recession.
Leaving the yield curve topic aside, the dovish stance of central banks in US, China and EU also raises concern that the global economy is struggling to stay on the growth path.
Some data have indeed been weak, but investors need to examine closely why that is so.
For example, the euro zone flash PMI shows the manufacturing sector is contracting further in March, due to weak performance of Germany.
But we should not stop just at these headline figures. The lackluster manufacturing sector in Germany is largely triggered by unique factors like Volkswagen’s diesel emissions scandal and rising competition from electric vehicles.
That has posed great threat to the German auto industry, if not the whole German economy.
It does not mean investors should neglect the PMI data. But there is no need to over-interpret these figures into a recession story. We should bear in mind that the media chatter may change quickly if the US-China trade tension eases, which could bold well for a recovery of PMI data.
Talking about recession, the US has experienced four such dips over the last four decades.
The one between 1979 and 1982 was the only recession triggered by aggressive rate hikes. That was the era when Paul Volcker chaired the Federal Reserve. He raised the rate to a record high level to tame double-digit inflation. Sadly, that also created a recession.
The other three recessions were all caused by turmoil in the financial system or asset markets, ranging from savings and loans crisis, internet bubble and subprime mortgage loans crisis.
Following a sharp decline in equities at the end of 2018, the Fed has quickly responded with a pause of its tightening policy and a timeline for ending its balance sheet reduction move.
Meanwhile, inflation in the US remains mild after an economic expansion of nearly a decade.
As such, a repeat 1979-1982 style recession can almost be ruled out.
Nobody knows what will trigger the next US recession.
It’s undeniable that global economic growth is running out of steam.
But judging from the credit market, where there are no strong signs of tension, the stock market is probably just using the recession fear as an excuse to pare back recent gains to reflect a more moderate growth outlook.
The recession talk is a bit premature in my opinion.
This article appeared in the Hong Kong Economic Journal on March 26
Translation by Julie Zhu
[Chinese version 中文版]
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