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Latest recession scare is a false alarm
Markets have been spooked by the inversion of the US bond yield curve, which often – but not always – heralds a recession.
City slicker: the UK is looking like a bargain right now
Early last week, global equities hit a five-month high. Then they had another growth scare. The US Federal Reserve warned that the US economy had slowed and said it would not raise interest rates this year. A gauge tracking Germany's manufacturing sector slipped to its lowest level in six-and-a-half years.
Also, the IHS Markit Purchasing Managers' index also fell below 50, the level that separates expansion from contraction. The final element of the triple whammy was the inversion of the US yield curve. The FTSE 100 slipped by 2% and Asian markets fell slightly further last week, notching up their worst week since November.
The yield curve plots the difference, or spread, between the yield on the ten-year US Treasury (government bond), and the yield on the three-month Treasury. It therefore shows how much it costs the US government to borrow money over ten years compared with three months. In normal times, the interest rate on loans rises with the lending period, so the yield curve slopes upwards.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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The macroeconomic backdrop certainly doesn't suggest an imminent recession. As the former Fed chair Janet Yellen told the Financial Times, the central bank is still pencilling in growth of 2% this year, which hardly amounts to "a dangerous situation". US growth may have slowed but it has hardly fallen off a cliff.
Across the Atlantic, the eurozone as a whole is faring reasonably well, says Andrew Kenningham at Capital Economics. The services and construction sectors are proving more resilient than manufacturing "even in Germany". What's more, there are signs that wage growth continues to be strong around the world. This should support consumption as well as inflation. Central banks remain supportive, with the Fed on hold and the European Central Bank announcing more credit for European banks.
There is still time
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Marina Gerner is an award-winning journalist and columnist who has written for the Financial Times, the Times Literary Supplement, the Economist, The Guardian and Standpoint magazine in the UK; the New York Observer in the US; and die Bild and Frankfurter Rundschau in Germany.
Marina is also an adjunct professor at the NYU Stern School of Business at their London campus, and has a PhD from the London School of Economics.
Her first book, The Vagina Business, deals with the potential of “femtech” to transform women’s lives, and will be published by Icon Books in September 2024.
