Despite growing fears that the US will enter into a recession this year, Pimco argues that such fears are largely “overdone”.
In an update titled The Recession of 2020, Pimco global economic adviser Joachim Fels said a US recession is much more likely in 2020 than 2016.
“Both our quantitative recession probability models and qualitative deliberations suggest that the fears of a recession in 2016 are overdone,” he said.
“The US economy has so far shown none of the typical warning signs that preceded past recessions: no overconsumption, no overinvestment and no overheating.”
Mr Fels conceded that the probability of a recession in 2016 has spiked recently – attributed to weak growth momentum and tighter financial conditions. However, he maintained that this probability remains “far below previous pre-recession periods”.
Mr Fels explained that the 25 basis point rate hike by the US Federal Reserve in December 2015 is not enough to spark a recession. He also said the Fed will likely pass on an additional rate rise this month and proceed more cautiously.
Moreover, he argued that household balance sheets are not strained and consumers are not overspending as seen prior to the 2008 recession.
“A recession is unlikely – though of course not impossible – as none of the conditions that have typically contributed to or caused past recessions currently prevail.”
Mr Fels added: “I still think it is much more likely that the next recession occurs in, say, 2020 – or any other year of your choice in the intermediate future – than in 2016.”
Economists agree that the Reserve Bank is likely to remain in inflation fighting mode until December. ...