There is “overwhelming” evidence that high interest rates have been working to cut inflation globally, however the risk of recession remains as economic growth slows, according to Shane Oliver, head of investment strategy and chief economist at AMP.
Putting the risk of recession at 40 per cent in Australia and the US, he said global and Australian growth has held up far better than expected a year ago, bolstered by the post-COVID reopening, resilient labour markets, and in Australia, unexpectedly strong population growth.
These odds of a recession remain unchanged from his prediction in November last year.
“Consequently, while global and Australian growth has slowed, it has remained positive,” Dr Oliver said.
“Our base case is for a further softening in growth but for it to remain positive ahead of lower interest rates providing a boost from later this year. However, the risk of recession remains high after what has been the biggest rate hiking cycle since the 1980s and this being reflected in inverted yield curves (short-term rates above long-term bond yields), falling leading economic indicators and tighter bank lending standards, all of which warn of the high risk of recession particularly as some of last year’s supports, like saving buffers, reopening demand and very strong population growth in Australia, start to fade.”
He opined that Europe is already close to recession following stagnant GDP over the last year and China, too, remains a risk as it faces falling population, trying to get consumer spending to take over as a key growth driver from the property sector and capital investment, and political tensions with the West.
“Fortunately, if a recession does occur it’s likely to be mild as most countries have not seen a boom in consumer spending, business investment or housing investment that needs to be unwound,” Dr Oliver added.
As observed with the January US CPI, which was hotter than expected and increased 0.3 per cent to 3.1 per cent, he warned of a “bumpy ride ahead” as markets carefully watch for signs of monetary easing.
Central banks are likely to start cutting rates in the June quarter, he said, with the Fed and European Central Bank (ECB) expected to cut five times this year by 0.25 per cent each time, and the RBA three times.
Meanwhile, Bank of America’s monthly Global Fund Manager Survey found that global fund managers are gearing up for a soft landing.
Surveying almost 250 panellists with US$656 billion in assets under management between 2 and 8 February, it found global fund managers are no longer predicting a recession for the first time in almost two years.
“Expectations for strong macro and no recession keep investors in the ‘soft landing’ camp at 65 per cent, with ‘hard landing’ probability fading to just 11 per cent.
“A rising percentage of investors expect ‘no landing’ at 19 per cent, up from 7 per cent in January and now higher than the percentage expecting ‘hard landing’,” it stated.
Overall fund manager sentiment, which is based on cash levels, equity allocation and economic growth expectations, rose from 2.9 last month to 4.1 to its most bullish level in more than two years.
