Key points

  • Tighter financial conditions around the turn of the year have raised fears of a US recession.
  • Estimated recession probability indicators remain below thresholds reached before previous downturns. For now, we do not expect a recession in the US over the next 12 months.
  • The path of risk sentiment will be important from here. We consider a lot of bad news to have been priced in and look to some improvement over the coming months.
  • Yet tighter financial conditions should further soften the growth outlook for 2019. We lower our GDP forecast to 2.2% for this year, leaving 2020 unchanged at 1.4%.
  • We expect the Federal Reserve to tighten policy twice more this year.

Recession probability model says NO

The turn of the year saw market tensions rise over the outlook for the US economy. While a number of developments, including a less-dovish-than-hoped US Federal Reserve (Fed) hike in December and a shutdown of the US government, added to fundamental concerns, deterioration in financial markets caused most alarm. From mid-December, the US equity S&P 500 index extended losses beyond the 10% ‘correction’ territory that it had held for much of the quarter, extending to a 20% drop by Christmas Eve. US high-yield spreads, which had widened by 126 basis points (bps) to mid-December, widened a further 102bps to 544bps – their highest since February 2016 - and parts of the US yield curve, including the 3 month -10 year portion, inverted. All of these moves were seen as consistent with an impending US recession.

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