Just the timing that's unclear
The odds of another US recession are 100%; it's just the
timing that is unclear,
writes BNP Paribas in a note to clients today.
"Clients often ask us the probability of another US recession.
We generally answer "100%", but fight giving a precise timing.
The fear of recession is one reason the Fed has been so cautious
in normalizing its interest rates. Paradoxically, the long wait
may have actually increased the probability of another recession
in the next few years," BNPP clarifies.
We expect the Fed to see this and so our expectation is
that, after an initial period of denial, in the event of
recessionary forces the Fed is likely to quickly move to negative
rates, adopt strong forward guidance and also implement another
round of QE.
Unfortunately, this limited ammunition is unlikely to be
enough. More active fiscal policy may have to be the ship that
comes to the rescue, which could take some time to be
implemented. Despite near-zero growth in Q4 2015, we think a
recession is coming, but probably not now. The widening in
corporate spreads, beyond the energy sector, has us worried. The
global economy is on fragile footing and, with a loss in
confidence that US corporate borrowers can pay back their debts,
what's already bad now is likely to get a lot worse," BNPP
"We are also concerned that stricter regulatory regimes and a
reduction in the capacity of genuine market makers to warehouse
financial assets will make for a more-pronounced market reaction
to the recession. Banks may also be quick to pull in lines of
credit. This risks more market disruption, threatens the ability
of firms to raise capital and probably forewarns a larger effect
on the real economy. Firms will have to cut capex and jobs
quickly, and declining household wealth is likely to crimp
consumption, as will job losses. And imagine the effect of a US
recession on an enfeebled global economy, particularly on
emerging markets. Especially if the USD falls, as is likely, it
will present challenges to the euro area and Japan, where
policies are currently reliant on cheap currencies.
It won't be pretty,
" BNPP adds.
BNPP thinks the next US recession will probably be
longer than is typical, where the average is a four-to-five
quarter contraction. A longer recession, according to BNPP,
would be likely for a few reasons:
The Fed has little ammunition to combat a recession -
during the last recession the fed funds rate was 5.25% before the
first 50bp cut. While negative real rates are our central
scenario in the event of another recession, the cut in rates will
have to be much smaller than historically and so the stimulus
will be much less;
The shock and awe created by QE1 will be lacking - no one
in the markets believes in the power of QE to the same extent as
when Bernanke first introduced it;
Core inflation is lower than prior to previous recessions,
meaning deflation risks are larger, with more corrosive effects
Fiscal policy makers appear very reluctant to pass fiscal
stimulus, particularly the size of a package necessary to offset
a drop in GDP;
With investors still licking their wounds from the last
crisis, it's unlikely that confidence will be restored very
While US housing does not have the sub-prime distortions of
2007, house prices in relation to incomes are high and could
suffer more than most reckon.
The global economy looks weaker and there is less room for
the sort of stimulatory policy we saw after the GFC (eg, in
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