This week's IDB, 'The Global Economy: Time to hit the panic button?' delivered by Chief Investment Officer, Pau Morilla-Giner, discusses the following:
- Recently a list of concerns, (industrial production, equity drawn down, high yield spread widening and tightening bank credit) have made investors nervous, raising the question of whether it’s time to hit the panic button for economic downturn.
- Industrial production is contracting, but we’re not seeing the steep declines of previous global recessions, much of this weakness is centred in the energy industry. Only 20% of US manufacturing sectors are contracting.
- Large equity falls and widening high yield spreads can adversely impact sentiment, weakening consumption and investment. While equities haven’t historically been a good forecaster of future economic weakness, widening high yield spreads that risk spilling over into corporate balance sheets have been a more reliable indicator.
- Credit standards in the US have become less accumulating, but this change has been modest and not consistent with the tightening that has coincided with previous US recessions.
- Currently we remain on “amber alert,” these signals warrant caution, but for the meantime we believe the current wave of volatility is more reminiscent of 1998 or 2011-12, where concerns didn’t translate into economic down turn. We also feel that Central banks still have the ammunition to act and defend economies against growth scares as necessary.
Please click here to view the presentation.