Signals coming from financial markets, like the further compression in sovereign bonds’ term spreads and the inversion of the US yield curve, have raised worries of an imminent recession in developed economy
Recession risks are limited, but policy responses too
Highlights:
- Signals from financial markets and sliding business confidence have raised fears of a recession in developed economies. A slowdown appears more likely than a recession, as financial imbalances are less acute than before the 2008 crisis.
- However, the current situation appears different in another respect. The sharp rise in US tariffs may harm global value chains. On top of the hit to sentiment, this makes the global economy inherently more fragile.
- The scope for fiscal and monetary responses appear smaller than ten years ago. The ECB is testing new lows in deposit rates and there remain uncertainties on how far the next round of QE can go, while the Fed has some space to cut rates.
- On the fiscal front a strong response in Europe would hinge strongly on Germany, while the big stimulus enacted in 2017 leaves the US with very limited additional ammunition.
- In case of a large recession, unprecedented measures would likely blur the border between fiscal and monetary policies.
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