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Flat global growth for 2019, but no recession, says Aberdeen

Its chief economist does not see a China credit crisis; calls on central banks to loosen fiscal policy

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Mr Lawson says China has instruments to re-capitalise the banking sector in the event of a debt crisis.

Singapore

ABERDEEN Standard Investments' chief economist anticipates neither a US recession nor a Chinese credit crisis, but forecasts flat global growth for 2019.

Correspondingly, central banks need to loosen fiscal policy, said Jeremy Lawson, who also heads the global investment company's Research Institute.

Mr Lawson was careful to emphasise that he sees a slowdown and not a recession in the US. "I think that market participants are obsessing too much about the slope of the yield curve at the moment," he said at an event on Thursday.

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While an inverted bond yield curve is a popular bellwether for a recession, Mr Lawson argued that after factoring in the term premium, the US Treasury yield curve is actually flattened but still positive.

The term premium refers to the amount of compensation that investors need to hold longer-term risk. Stripping the term premium from the current yield produces what is known as the risk-neutral yield. Mr Lawson said this was at 2.7 per cent, using term premium data from the New York Federal Reserve. This indicates a normal, if flattened, yield curve, softening its recession signals.

Mr Lawson said that the risk-neutral yield curve's more ambiguous signals then demand confirmation against elements that "kill the business cycle" and cause a recession: oil price shocks, equity bubbles, credit imbalances, and aggressive monetary policy tightening.

For Mr Lawson, none of those elements are signalling a recession. Shale oil currently mitigates oil price shocks and equity valuations are not at extreme levels. Further, US household leverage is below pre-financial crisis levels, and banks are better capitalised. Monetary policy was at the risk of over-tightening last year, but is currently either loosening or on hold.

"If I put that together, I would say, yes, recession risk has increased. There is an underlying fragility about the global economy at the moment - we don't want to ignore it - but I'm very wary of saying there must be a recession in 2020, this is coming down the pipeline, prepare for it."

Similarly, he said that Chinese debt levels present a quite nuanced problem. A lot of China's debt is held in state-owned enterprises, which means that in the event of a crisis, "China has instruments to socialise and re-capitalise the banking sector."

Further, most of China's leverage has been internally financed. This means that unlike in other emerging markets, investors will not pull money out of the country en masse in the event of a a sudden stop in capital flows, said Mr Lawson.

He believed a Chinese credit crisis would resemble Japan's credit bubble in the 1980s. Instead of a single deep recession, Japan had "debt overhang for a long period of time that acted as a persistent drag on growth that was quite disinflationary."

This slowed but stabilised global growth forecast depends, of course, on the current levels of political upheaval around the US, China, and European Union holding or improving, as well as on central banks easing monetary policy.

"Against this backdrop we have lowered risk across our macro investing portfolios while we await clearer signs of which way the economic, political and policy triggers will break," said Mr Lawson.

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