Fears of recession: overdone in the US but maybe not in Germany
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses some recent developments in the US and the EU:
- Recession fears mounted in the US when the spread between the yield on the 10-year Treasury note and that on the 2-year note initially, and briefly, turned negative in mid-August (“yield curve inversion”).
- This specific metric has been a reliable, though not totally reliable, predictor of US recessions over the past 50 years.
- US economic fundamentals are, however, firm and do not point to recession in forthcoming quarters.
- German GDP slipped 0.1% (QOQ) in 2019Q2 to be just 0.4% higher YOY. The Bundesbank warned that weakness was expected to continue in 2019Q3, leaving the economy on the brink of a technical recession, defined as two consecutive quarters of negative GDP growth.
- German industrial production fell 1.8% (MOM) in July, to be 6.2% lower YOY. The German economy is disproportionately affected by changes in production, as the sector accounts for over 25% of GDP, compared with 14% in, for example, the UK.
- For the EU28 as a whole, GDP rose 0.2% in 2019Q2, with reasonable growth in Spain, the Netherlands and, especially, Poland (of the major EU economies). French GDP rose 0.2%, whilst Italian GDP was stagnant.
Concerning UK developments:
- Public sector net borrowing (PSNB) showed a disappointing surplus of £1.3bn in July 2019, compared with a surplus of £3.6bn in July 2018.
- The cumulative PSNB for the first four months of FY2019 was £16.0bn compared with £10.0bn in FY2018.
- The OBR forecast a PSNB of £29.3bn in March 2019, compared with the current outturn of £23.6bn for FY2018. The chances are that the OBR’s forecast will be overshot, curbing the Chancellor’s scope for a fiscal boost in the Budget.
- The ONS is making methodological changes (including the treatment of student loans) from September, which result in an increase in PSNB in FY2018 of £13.3bn and will increase the PSNB by similar amounts going forward. This also curbs the Chancellor’s scope for a fiscal boost.
Ruth Lea said, “…the markets’ reaction to the inverted yield curve in mid-August, and the possibility of recession in the US, seem very overdone. Former Fed Chair Janet Yellen’s comments, that the inverted yield curve was a “less good signal” of recession “on this occasion”, and that the US “has enough strength” to avoid recession, seem reasonable. But Germany’s economy does seem to be on the brink of technical recession or, at best, a period of stagnation as its heavily production weighted, and export-led, economy suffers from the slowdown in world trade growth.”