Is a global recession looming or is this just premature pessimism?

September’s market action was in clear contrast to the previous month. On the surface, August’s concerns about global growth and trade wars and geo-politics gave way to a somewhat more optimistic mood in which the relative performance of key asset classes was reversed.   

However at the end of it all much of the price action between August and September simply cancelled itself out.  In fact, you could have gone to sleep at the end of July and woken up at the end of September and presumed nothing much happened on the All Ordinaries and S&P500 markets at all, even though there were V-shapes in between.  But as we all know by now uncertainty creates volatility and the ever-growing list of developments (Brexit, Trade Wars, Impeachments, Hong Kong, and now Turkey/ISIS) is fuel on the fire.

But is a global recession looming or is this just premature pessimism?

It is the key question preoccupying the markets (and the commentary) at the moment and charts like the one below point to some worrying trends. 

A broad array of leading indicators suggest that the global economy is losing altitude (red line). These leading indicators which include the manufacturing surveys as well as consumer surveys, credit growth, and yield curves suggest that the global economy is descending towards even slower growth of 2% in 2020 – down from 3.6% last year and 3.2% in mid-2019 (blue line). 

The US ISM manufacturing survey slumped to a decade low, and Europe’s Purchasing Managers Index survey is at a seven year low.

But manufacturing is only one component of the global economy.  Consumer spending, housing construction, government spending, and the service sectors are other key components that also warrant attention.  While all major economies have slowed, the global economy is not yet in a state that warrants hitting the panic button – check the blue line during the GFC.

It is important to remember that the services sector in many developed economies, including the US, is larger than the manufacturing sector and each of the portfolio managers or analysts we’ve talked to in recent weeks still quote the strength of the consumer sector, particularly in the US, as the main reason at this stage why a global recession is unlikely.  

So the pessimists might be premature for now, but the global economy is vulnerable and any major economic, financial, or political shock could be enough to bring a global recession closer.

Other Sources:  MLC, Quilla Consulting, RBA.