US recession in 2020, warns Zurich Insurance

Guy Miller, chief market strategist and head of macroeconomics at Zurich Insurance, thinks a US recession will come in 2020 due to a lack of spare capacity. Miller says in this late-cycle phase US markets will continue to do reasonably well, along with emerging markets, especially China, which he argues is now attractively valued.

It has been ten years since the US subprime mortgage crisis led to the collapse of Wall Street giant Lehman Brothers in 2008. It sparked a global financial meltdown and saw a wide-reaching economic recession ensue, prompting unprecedented fiscal and monetary stimulus measures across the world. A decade later, investors are now trying to predict the next recession.

At the turn of this year, many economists and analysts hailed a synchronised upswing in global growth. Colombia Threadneedle wrote, ‘corporate profits are rising, trade is expanding, and growth is robust in the US, Europe and beyond. Asia is benefiting from this global phenomenon' and there is a 'continued uplift in China’. However, this narrative was short-lived. The Brookings Institution wrote in September that ‘the US leads the pack among major advanced economies, with real gross domestic product (GDP) now 18% above the pre-crisis level’ and warned of ‘uneven progress and some structural disconnects’, a decade after the financial crisis.

Many experts are forecasting a recession in less than two years, including Guy Miller, chief market strategist and head of macroeconomics at Zurich Insurance, who told IGTV’s Victoria Scholar that he believes a US downturn will hit in 2020, due to a lack of spare capacity. He says that in this late-cycle phase, the country’s markets will continue to do reasonably well, along with emerging markets (EMs). He also argues that China is now attractively valued and in the medium term is unlikely to have a hard landing. However, the US-Sino trade tensions could last a lot longer than previously thought.

When looking for warning signs, many analysts look to the bond market, in particular the US treasury yield curve. An inverted slope with 10-year yields falling below 2-year yields is a phenomenon that has preceded previous recessions. However, while the curve has certainly been flattening, it is yet to fully invert. IG’s chief market analyst, Chris Beauchamp, points out that ‘on average the yield curve inverts 19 months before the next recession. We still do not see any warnings signs of a near-term recession. We’re not even in the amber stage of warning’.

Elsewhere, the tit-for-tat global trade spat initiated by US President Donald Trump’s administration, along with its steer towards protectionism has raised questions about the impact of US politics on global growth. The Organisation for Economic Co-Operation and Development’s (OECD’s) chief economist Laurence Boone warned that ‘uncertainty created by rising protectionism is a danger for investment and productivity looking forward’.

Beyond this, investors are closely watching the US Federal Reserve (Fed), which has been on a rate hiking path for three years. This has prompted questions about the risks of a recession induced by a central bank, if monetary policy is tightening too quickly.

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