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Goldman Sachs’ economists declared the U.S. economy all but recession-proof at the dawning of 2020, but now it appears a coronavirus-induced recession may have begun just a few months later.
The analysis didn’t account for a “Black Swan,” a term for an improbable and unforeseen event. Instead, it explored the idea of a “Great Moderation,” which is characterized by low volatility, sustainable growth and muted inflation.
“Overall, the changes underlying the Great Moderation appear intact, and we see the economy as structurally less recession-prone today,” Goldman economists Jan Hatzius and David Mericle wrote.
The economy, they argued, would settle gently after 11 years of growth.
“While new risks could emerge, none of the main sources of recent recessions — oil shocks, inflationary overheating, and financial Imbalances — seem too concerning for now. As a result, the prospects for a soft landing look better than widely thought.”
All the risk assessment and economic modeling in the world is futile if it can’t anticipate the one variable that matters most — particularly if it’s a pandemic.
People waiting on a line to enter Trader Joe’s in New York, March 12, 2020.
Valerie Block | CNBC
Pioneering economist Burton Malkiel, who is also chief investment office at Wealthfront, was also bullish on the U.S. economy as the year began. Appearing on CNBC’s “Squawk on the Street,” he said he could not spot a recession on the horizon. He also qualified his remarks by saying that predicting a recession is a very difficult task.
“My guess is, if we have a recession, what’s going to cause it is some shock that we don’t know of now,” said Malkiel, author of the 1973 book “A Random Walk Down Wall Street.”
“Some international shock,” he predicted. “It’s going to be something like that, not something we can see in the immediate future.”
Recessions are not officially declared until the economy is already deep into them, or until after they’ve passed.
Economist Alan Blinder told CNBC’s “Squawk on the Street” on Wednesday that the U.S. was probably already in a recession as the coronavirus outbreak cancelled conferences, events and travel plans.
“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March,” said Blinder, a former Federal Reserve vice chairman who now serves as a professor at Princeton. “It wouldn’t be a bit surprising to me.”
By slight contrast, JPMorgan economists predict the U.S. will skirt the technical definition of a recession. They’re calling for negative growth in the nation’s gross domestic product, but they’re calling that a “novel-global recession” since it will only be temporary, according to their forecast.
In January, it was easy to make bullish forecasts because stocks were setting record highs. Coronavirus was just beginning to make headlines, and it was the furthest worry from most investor’s minds. Many economists and analysts, in fact, were expecting a slowing economy to glide to a soft landing.
Still, analysts warned about flat corporate earnings, weak manufacturing, high corporate debt loads, a possible resurgence of the U.S.-China trade war, and a potentially divisive election cycle. And for a brief moment, the top worry was the prospect of a war with Iran after an air strike that killed Qasem Soleimani, an Iranian major general in the Islamic Revolutionary Guard Corps.
“A violent escalation of hostilities between the U.S. is nearly certain in the coming days, a game changer that will obscure everything else,” declared Greg Valliere, chief U.S. policy strategist at AGF Investments. “There’s a reason, finally for caution in the stock market.”
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, had put out a note that said the corporate earnings outlook was flat and that the market “feels toppy.”
“Weak revisions don’t bode well for early 2020,” she wrote.
Other market observers warned about lofty price-to-earnings ratios and a high concentration of investment in just a handful of stocks, such as Facebook, Apple, Amazon, Netflix and Google parent Alphabet.
“We still think the greatest risk in the equity market remains in growth stocks, where expectations are too high and priced,” Michael Wilson, chief U.S. equity strategist at Morgan Stanley, wrote in December.
UBS analysts warned of a coming wave of credit downgrades for U.S. stocks, which may still be on the way as a pandemic grinds portions of the economy to a halt.
“It’s no great secret that U.S. companies have been piling on debt in the past decade,” the analysts wrote. “A mere ten years after the financial crisis, total non-financial corporate debt stands just shy of $10 trillion, or about 50% higher than the lows seen in 2009. Interestingly, debt is NOT a major theme in today’s marketplace.”
Last summer, recession worries escalated when the bond market experienced an inversion of the yield curve. Short-term Treasurys began paying a higher yield than long-term Treasurys – a phenomenon that portends a downturn is due within the next 22 months or so.
Michael Darda, chief economist and market strategist, warned that ignoring the yield curve was a mistake. “We are somewhat baffled by the gaggle of Wall Street strategists cheerleading the soft landing based on what we believe is a faulty reading of the macro indicators,” he wrote. “One frequent refrain is that we now have an upward sloping yield curve and hence recession risk has evanesced. Yet, the curve is, on average, 12 months ahead of the cycle, not an instantaneous indicator of real time recession risk.”
In the end, most of the things investors were worried about did not trigger one of the biggest market crashes in Wall Street history or the economic pain that most assuredly will follow. It was an outbreak of a new virus that many thought would be contained to foreign lands — and this was truly a Black Swan.
“We are going into a global recession,” warns chief economic advisor at Allianz Mohamed El-Erian, who correctly called the bear market as it approached. “The economic damage is going to last.”
(Bloomberg) — The International Monetary Fund expects OPEC and its partners to start increasing oil output gradually from July, a transition that’s set to catapult Saudi Arabia back into the ranks of the world’s fastest-growing economies next year.
“We are assuming the full reversal of cuts is happening at the beginning of 2025,” Amine Mati, the lender’s mission chief to the kingdom, said in an interview in Washington, where the IMF and the World Bank are holding their spring meetings.
The view explains why the IMF is turning more upbeat on Saudi Arabia, whose economy contracted last year as it led the OPEC+ alliance alongside Russia in production cuts that squeezed supplies and pushed up crude prices. In 2022, record crude output propelled Saudi Arabia to the fastest expansion in the Group of 20.
Under the latest outlook unveiled this week, the IMF improved next year’s growth estimate for the world’s biggest crude exporter from 5.5% to 6% — second only to India among major economies in an upswing that would be among the kingdom’s fastest spurts over the past decade.
The fund projects Saudi oil output will reach 10 million barrels per day in early 2025, from what’s now a near three-year low of 9 million barrels. Saudi Arabia says its production capacity is around 12 million barrels a day and it’s rarely pumped as low as today’s levels in the past decade.
Mati said the IMF slightly lowered its forecast for Saudi economic growth this year to 2.6% from 2.7% based on actual figures for 2023 and the extension of production curbs to June. Bloomberg Economics predicts an expansion of 1.1% in 2024 and assumes the output cuts will stay until the end of this year.
Worsening hostilities in the Middle East provide the backdrop to a possible policy shift after oil prices topped $90 a barrel for the first time in months. The Organization of Petroleum Exporting Countries and its allies will gather on June 1 and some analysts expect the group may start to unwind the curbs.
After sacrificing sales volumes to support the oil market, Saudi Arabia may instead opt to pump more as it faces years of fiscal deficits and with crude prices still below what it needs to balance the budget.
Saudi Arabia is spending hundreds of billions of dollars to diversify an economy that still relies on oil and its close derivatives — petrochemicals and plastics — for more than 90% of its exports.
Restrictive US monetary policy won’t necessarily be a drag on Saudi Arabia, which usually moves in lockstep with the Federal Reserve to protect its currency peg to the dollar.
Mati sees a “negligible” impact from potentially slower interest-rate cuts by the Fed, given the structure of the Saudi banks’ balance sheets and the plentiful liquidity in the kingdom thanks to elevated oil prices.
The IMF also expects the “non-oil sector growth momentum to remain strong” for at least the next couple of years, Mati said, driven by the kingdom’s plans to develop industries from manufacturing to logistics.
The kingdom “has undertaken many transformative reforms and is doing a lot of the right actions in terms of the regulatory environment,” Mati said. “But I think it takes time for some of those reforms to materialize.”
©2024 Bloomberg L.P.
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
©2024 Bloomberg L.P.
The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
Author of the article:
Published Apr 18, 2024 • 2 minute read
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
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The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
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The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
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Article content
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
Article content
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