SINGAPORE (Sept 25): Oxford Economics says there is little chance of a global recession next year given evidence on the ground of a major and sustained worldwide slowdown is still thin.
However, Oxford Economics has warned of a so-called “Bermuda Triangle” of interconnected risks that are at their highest since the Global Financial Crisis.
In the Sept 24 report Global Macro Theme: Global economy’s Bermuda triangle risk is growing, the research house says the three risks are inflation, tighter monetary policies amid recession risks and trade wars as well as tightening global liquidity.
Firstly, labour market flexibility could transmit higher-than-expected inflation, particularly in the United States and macro economists have not seen such a combination of tightness, flexibility and trade protectionism before.
“We still think persistent global forces of wage restraint may dominate,” says Gabriel Sterne, Head of Global Macro Research, Oxford Economics, “We could even see unemployment going back to the post-war heyday, but it is hard to be confident with so few precedents.”
Secondly, policymakers have been able to achieve a remarkable global macro stability in recent years only because inflation has afforded flexibility. But if US inflation does pick up, the US loose fiscal/tight monetary policies may hinder global stabilisation efforts.
“There are serious concerns that global sectors with excess leverage will be badly exposed. And global trade wars, could generate a nasty supply shock with stagflationary consequences,” adds Sterne.
What’s worse, US and China will not absorb each other’s shocks forever. In recent history, when the US and global economies slowed, China relaxed policies to meet growth targets.
“Shocks (such as a trade war) that act negatively on both the US and China would represent a major reversal. Our examination of numerous indicators suggests that the world trade boom is already over,” says Sterne.
Meanwhile, global liquidity is expected to tighten. In fact, cross-border bond purchases is expected to fall dramatically in 2018 and 2019, averaging US$0.5 trillion ($0.7 trillion) as opposed to US$1.2 trillion in 2017.
According to Sterne, the termination of ECB asset purchases is very important, as it could signal an aggressive return of European portfolios back to domestic fixed income securities. This could reduce cross-border purchases by European investors by €200 billion ($321 billion) per year.
“The markets are right to be nervous and they will probably get more so beyond next year as liquidity drains and capacity constraints bite further,” concludes Sterne.
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