US recession odds pick up on growth cut estimates

Growth will average 2.3% this year, down from 2.5% seen in a July survey


NEW YORK: The likelihood of a US recession in the next 12 months rose to 35 per cent in an August survey of economists, from 31 per cent forecast previously, as global trade tensions fuel economic uncertainty. Growth in the world’s biggest economy will average 2.3 per cent this year, down from 2.5 per cent seen in a July survey. Gross domestic product expansion is forecast to slow to a 1.8 per cent annualised pace in the third quarter, from 3.1 per cent in the first three months of the year and 2.1 per cent in the second quarter.

“rade tensions are needlessly roiling financial markets, which could eventually destabilise a stable economy, Parul Jain, chief investment strategist at Macrofin Analytics LLC in Wayne, New Jersey, said in comments attached to her survey response. President Donald Trump last week announced new tariffs on imported Chinese goods, to take effect on September 1, causing steep declines in global stock markets. The S&P 500 index of US stocks has fallen more than 3 per cent since July 31. That was the day the Federal Reserve cut interest rates for the first time since 2008, to a range of 2 per cent to 2.25 per cent, in a bid to support the economy.

Economists moved up expectations for the next Fed interest-rate cut to September from December and now see a 25-basis-point reduction in the benchmark rate, to a range of 1.75 per cent to 2 per cent, at the next meeting, according to the poll. Global growth forecasts for 2019 were also cut, to 3.2 per cent from 3.3 per cent. Bloomberg’s survey was conducted August 2 to August. 7. Even as the Federal Reserve lowered borrowing costs in July, it tried to temper expectations that a string of additional moves were imminent. But in the financial markets, it is clear that investors expect rates to fall fast.

In bond markets this week, yields on government debt have touched lows not seen since 2016, when a sharp slowdown in economic growth and what many now view as a minirecession — gripped the economy. The decline implies investors have substantially downgraded their expectations for the economy. The yield on the 10-year note, which was higher than 2 per cent a little over a week ago, fell briefly under 1.60 per cent Wednesday. Yields on 30-year Treasury bonds approached their record low of 2.106 per cent.

Yields move lower when bond prices rise, and the latest leg downward began as the trade war between Washington and Beijing suddenly escalated and investors began to buy government bonds as they sought the relative safety of those investments. The notion that a protracted conflict could weigh on global growth was further fuelled Wednesday when central bankers in Thailand, India and New Zealand all of which have important trading relationships with China — lowered interest rates more than analysts had expected.

Officials at the Fed have stopped short of suggesting that they are at the beginning of an aggressive rate-cutting campaign. On Tuesday, the president of the Federal Reserve Bank of St. Louis, James Bullard, seemed to indicate that he did not see a reason to rush to cut rates in response to every twist of the trade war.

I think we’ve already adjusted for the ratcheting up of trade policy uncertainty, Bullard said. Let’s wait and see. Let’s see how the economy responds to that. Investors do not seem so patient. In the futures markets, where traders bet on moves in the central bank’s key federal funds rate, another cut in September is seen as a certainty. In the bond market, yields on every security offered by the Treasury Department from debt that is due in one month to debt due in 30 years are now below 2.25 per cent. That also suggests bond investors expect the Fed’s target range to drop and stay low for the foreseeable future.

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