With recession lights amber, brittle markets vulnerable to all shocks
By Mike Dolan
LONDON (Reuters) - Financial markets that predicted eight of the last six recessions may be yet be wrong again, but market stress itself is now part of the calculus and leaves the world more open to left-field shocks.
Given the violence of this year's slump in equities, where more than $8 trillion has been wiped off global stock market values, it is remarkable how few economists still see recession as the most likely outcome.
Yet more and more believe it will be a close-run thing; protracted market volatility itself could well tip the balance and investors are in no mood to hang about for a confirmation.
Anxiety is high, with few extraordinary policy measures now likely or even available, and more negative interest rates in Europe or Japan seen by many as part of the problem rather than the solution for a bruised banking system.
It may take a nervy few months for clarity on whether the worrying slide in global industry, trade and investment late last year has deepened, or to see if indebted consumers and a still-growing service sector will save the day.
While they wait, investors are scrutinizing the many geopolitical risks and systemic concerns that would typically be ignored in periods of more robust growth, but which may now be magnified as additional threats to businesses' and households' investment or spending plans.
In cutting its world growth forecast for this year to 2.7 percent from 3.1 percent - still above the 2-2.5 percent level many see as a baseline to avoid an effective per-capita global recession - Axa Investment Managers flagged concern about systemic as well as cyclical risks for markets in this climate.
"When global growth is so sluggish, when corporate profits are so miserable, when pay rises are so small - you don't need a very big shock to disturb global markets significantly," said Eric Chaney, Chief Economist at French insurer Axa. Continued...