The global economy is most likely headed for a recession, according to Ninety One’s head of multi-asset income John Stopford.
Central banks are hoping that they will be able to steer the global economy to a ‘soft landing’ scenario where inflation gets under control with only a slowdown in growth.
However, Stopford warned that a more likely outcome is a ‘hard landing’ where the global economy suffers a full-blown contraction. “Our central scenario at the moment is a global recession,” he said.
He argued that central banks are focusing too much on backwards indicators like the PCE and CPI rather than looking at other indicators such as those in the labour market or credit market.
“The danger of focusing policy on backwards indicators is that they’re already having an impact,” he said. “You basically tighten policy too long and cause a recession. We think that’s the most likely outcome, although its no longer the consensus view.”
The market is missing the time lag
Underpinning the market’s hope for a soft landing are the US Federal Reserve’s official forecasts for higher GDP growth and lower unemployment, as well as the equity markets pricing in earnings growth.
“That’s a really benign set of forecasts,” Stopford warned. “It is quite difficult to achieve that. It’s almost the perfect landing spot. You need to have everything come right.
“Why we still think the hard landing is more likely is because historically there are quite long lags between policy tightening and its impact on the global economy.”
He argued that central bank policymakers, as well as most market participants, are missing the time lag between interest rate rises and the effect it has on the economy.
“We are less than 18 months into the most aggressive rate cycle we’ve seen since the 1970s,” he said. “Rates have gone up over 5% in less than 18 months. To assume we’ve seen all the effects already is hopeful.”
He said surveys of lending expectations are starting to look “pretty bad” and that weakening credit growth will eventually lead to very weak or negative GDP growth.
“There are a lot of indicators that suggest that recession very likely,” he added. “It would be an unusual outcome if all of the tightening we’ve seen and what it’s done to a lot of leading indicators wasn’t followed by a US recession.”
What happens after the ‘landing’
One problem with the market’s expectation of a soft landing is what happens after the fact. He fears that if there isn’t either a global recession or a soft landing, the third outcome could be much worse.
This scenario is the firm’s risk case, where economic growth and inflation remain more persistent and central banks are forced to tighten more aggressively.
“That’s a dangerous environment for most asset classes because nothing is really priced for that,” he said.
“If Fed funds don’t peak at 5.5% but they peak at 6.5% or 7%, that’s quite scary. I think that almost guarantees a hard landing sometime later.”
