We ended 2018 on a rollercoaster ride of emotion. The year ended with the notion that the markets have priced in lower economic growth, which has been a key driver for the recent sell-off in the markets. Subsequently, this has resulted in increased concerns of investors and expectation for a recession in 2019. About half of the US CFOs expect recession by end of 2019. Furthermoreforecastersrs see a decline in the GDP in the next year, which make the next few quarters telling of the fate of the markets.
Historically, there have been more than 30 instances of US recession since the mid-1800s. Majority of the cases prior to the World Word 2 (WW2)-era have been attributed to the financial sector. However, a majority of the post-WW2 recessions have been secondary to monetary policy tightening and oil, in addition to sentiment0driven swings in borrowing and investment. Furthermore, historically, rate hikes – attributed to high inflation – and rapid tightening has subsequently ended in a recession.
All in all, Debt and leveraged loan continue to be an area of concern for most. Despite the low US unemployment – which has been sited to be as low as it has been for the last two decades – today’s average wage has a lower purchasing power than it did four decades ago. This, in addition to the growing debt, there is cause for serious concern regarding the repayment of such debt and the ability of the debt holder. PEW research has also indicated that those with student loan debt, are also more likely to have debt in other types of debt as well (i.e. Credit Cards). How will this come into play in 2019… it is still unclear.
Various experts have stated that the risk of recession is exceedingly increased in 2019 and it is even higher within the next three years. In fact, Goldman Sachs has estimated the probability of a recession to be more than 40% within the next three years.
I suppose we are no longer attempting to answer the question, whether there will be a recession or not, but rather when there is one, what will be the root of it. As stated above, the majority of the post-WW2 recessions have been attributed to the tightening of monetary policy in response to inflation usually boosted by oil shocks. Tightening cycles, no matter how tame, have been attributed to the recession. For instance, mild tightening in the late 1950s resulted in a recession.
Will there be a recession in 2019?
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