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Are we on the cusp of a recession?

Models used to forecast market directions suggest the risk of a global recession in the next two years is low, but minor shifts in market performance could change that drastically, according to a global investment firm.

Models used to forecast market directions suggest the risk of a global recession in the next two years is low, but minor shifts in market performance could change that drastically, according to a global investment firm.

Last year saw many investors worry that “stuttering growth” in numerous countries and “plunging” commodity prices could prompt a recession (a period of poor performance typically indicated by two consecutive quarters of negative GDP growth), a recent report from Standard Life Investors noted.

“Although the worst fears of investors were not realised, and global economic growth has subsequently reaccelerated, the episode serves as a useful wake-up call,” the report said.

“It forces us to question where we sit in the global business cycle and – most importantly – when is the next recession due?”

Using a number of forecasting models, the asset management firm analysed the current market environment and found the chance of a global recession in the short term is slim, but cautioned that investors shouldn’t relax just yet.

“The modest risk of recession flagged by our models should not provide cause for complacency, especially for those investing on longer horizons,” the firm said.

“Our models have some predictive ability one and two years ahead, but their reliability fades as time goes on because the forces that bring cycles to an end are not always in view that far out and some recession triggers fall outside the scope of our framework.”

Additionally, the economists who put the report together found that only slight adjustments to market conditions were needed to dramatically increase the risk of a recession, with the most notable example being a single standard-deviation fall in year-on-year returns increased the probability of a recession on a three month horizon by 20 per cent.

Changes in a number of other variables, such as real residential investment and credit spreads are also likely to affect the possibility of a global recession, the report cautioned.

Standard Life Investments said that investors can feel confident about extending their investment horizons “for now”, but that they should keep an eye on the market moving forward to minimise their risk.

Are we on the cusp of a recession?
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