BofAML, Morgan Economists Say Chances of U.S. Recession Rising

Jan 22 2016 | 8:16pm ET

Economists for several large global banks have said the risks of a recession in the next twelve months, while still relatively small, are rising amid the carnage of the first weeks of 2016.

BofAML noted that the huge inflow of cash into government bond funds, typically viewed as a safe haven during times of market stress, indicates investors fear the global economy could tip into recession. The firm’s U.S. economists upped their chances a recession in the United States in the next year from 15% to 20% and cut their GDP growth forecast from 2.5% to 2.1%.

That said, they also noted that a repeat of the 2008-09 great recession was "a big stretch" and even the one-in-five chance of a normal recession remains low.

In the three weeks through January 21, some $7.8 trillion was wiped off the value of global stocks, noted BofAML in a research note. Economists Ethan Harris and Emanuella Enenajor "are concerned about the lack of policy ammunition to deal with a major shock.” However, “when markets are in such a fragile state, there is a temptation to lose sight of the economic fundamentals. To us, the economy is okay and recession risks are low," they continued.

BofAML is not the only global bank to be revising their recession expectations. Earlier this week, economists at Citi said the risk of a global recession was rising, while Morgan Stanley put the probability at 20% in a worst case scenario and Societe Generale said it was at 10 percent and rising. While not bad odds, the rate of change has some macro investors taking note. 

Morgan Stanley cites contraction in the factory sector and signs of slowing among services industries for its estimate, according to a note released on Friday. The bank’s economists forecast GDP growth in 2016 of a mere 1.8%. Among economists polled by Reuters recently, the median full-year forecast is 2.5%.

A slower-than-expected rate of growth this year could generate a “one-and-done” scenario for the Federal Reserve, noted Morgan Stanley, suggesting the December rate hike would be the central bank’s only move for the near term.

The rapid flight to quality since tremors in the markets accelerated at the end of last year has been fairly unsettling coming so soon after the onset of the Fed’s much-anticipated tightening cycle. Government bond funds attracted an extraordinary $5.1 billion in the week to Jan. 20, the biggest inflow in 12 months, according to Reuters, while the yield on the 10-year U.S. Treasury yield fell briefly back below 2% percent earlier this week.

Given the dramatic moves, investors are now pricing in just one 25-basis point increase by the Fed this year, and not until the back half of the year.

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