World Economy

US Recession Risks Rising

The US now accounts for less than one-fifth of global economic activity.
The US now accounts for less than one-fifth of global economic activity.
While the United States economy seems to be booming, 75% of ultra-high net worth investors feel that a recession is bound to happen by 2020

Energy market professionals estimate there is a 40% chance of the US economy entering recession before the end of next year, rising to a little over 50% before the end of 2020.

The results are based on a survey sent by Reuters to 7,000 energy market professionals between April 13 and April 17, with responses received from 700.

There is a wide dispersion of views, and most see only a low risk of recession in 2018, but the assessed probability increases significantly in 2019 and especially 2020.

The state of the global economy is one of the most important drivers for oil consumption and prices, so the economic outlook is crucial to the calculations of OPEC and other oil suppliers.

The United States now accounts for less than one-fifth of global economic activity, but the rest of the world is unlikely to grow strongly if the United States is in recession, so it makes a useful proxy for global growth.

Predicting turning points in the economic and trade cycles is notoriously difficult, but the current global expansion shows increasing signs of maturity and escalating trade tensions create clear downside risks.

OPEC and its allies, as well as other oil producers, need to incorporate the increasing probability of a US recession and global slowdown when projecting oil consumption and prices in 2019 and 2020.

Ultra-High Investors Concerned

While the United States economy seems to be booming, 75% of ultra-high net worth investors feel that a recession is bound to happen by 2020.

Just 21% of respondents felt that 2019 would be the year of the economic downfall of the country, while 50 felt 2020, according to the JPMorgan Private Bank's Spring Investment Barometer that was released this week.

More than 700 global private clients from Europe to the Middle East participated in the survey and were identified as ultra-high net worth individuals. Those individuals are deemed as having more than $30 million in liquid financial assets. High-net individuals only have more than $1 million in financial assets.

"Until we see clear imbalances building, and policy approaching a point where it really constrains economic activity, we lean towards a view that the cycle will continue to expand," said JPMorgan's Anthony Collard, head of UK and Nordic investments. He emphasized that while the ultra-high investors had valid concerns, the bank didn't see signs of the recession that were imminent.  

Trade Threats

The current cyclical expansion has considerable momentum in the short term, which should ensure that it continues in the short term, but there is increased anxiety about whether it will be sustained in 2019 and 2020.

Both the WTO and the IMF have warned about potential downside risks arising from increasing trade tensions between the United States and China.

The recent exchange of tariff threats between Washington and Beijing contains a substantial element of bluffing so it is hard to estimate the risks that the threats will turn into an actual trade war.

But even if the tariffs are never imposed, the increased uncertainty could have a damaging impact on business confidence and investment plans.

Survey respondents were evenly divided about whether the trade tensions would have a damaging impact on global growth. Some 48% thought trade tensions would harm growth between 2018 and 2020, which also implies 52% thought they would not or were unsure.

Respondents from North America were slightly less concerned than those in other regions, about the effect of trade threats, with only 45% thinking they would prove harmful.

In contrast, respondents from other regions put the probability of trade tensions damaging global growth marginally higher at 53%.

Mature Expansion

The current US economic expansion started in July 2009 and is already 106 months old, according to the Business Cycle Dating Committee of the National Bureau of Economic Research. The current expansion will become the second-longest on record next month, surpassing the long boom of the 1960s.

If the economy is still expanding in July 2019, it will become the longest on record, passing the long boom of the 1990s.

The US expansion is part of a synchronized global upturn in industrial activity and trade that is lifting consumption of oil and other commodities.

The global economy continues to display broad-based momentum and is predicted to remain healthy in 2018 and 2019, according to the International Monetary Fund. World output increased by 3.8% in 2017 and is forecast to rise by 3.9% in both 2018 and 2019 ("Global economy: good news for now but trade tensions a threat", IMF, April 17).

Global trade volumes increased last year at the fastest rate since 2011, when the global economy was still rebounding from the financial crisis, according to the World Trade Organization. The WTO forecasts trade will grow nearly as fast in 2018 and 2019, which would be the best run of growth since before the financial crisis.

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