US could face recession in 2018 says LGIM

3rd June 2016

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The US could face a recession in 2018 if the credit cycle turns from a virtuous to a vicious circle in the next few quarters says Legal & General Investment Management economist James Carrick. He has examined the US economic cycle, the impact of corporate profits, bad loans and credit conditions on overall economic growth and believes a recession is getting closer.

The engine of global growth, the US economy has been growing steadily since 2009 and its short term outlook appears reasonably benign.

“Our lead indicator points to stronger growth through the rest of 2016, as government spending accelerates and the drag from weaker capital expenditure in the energy sector fades,” says Carrick.

However, he says the cycle could turn as the crisis in emerging economies and the collapse in oil investment weigh on economic growth. This, combined with a stronger dollar and a tight labour market, has pushed US profits lower.

Furthermore, rising US interest rates are impairing indebted companies’ ability to service their loans and banks are tightening credit conditions, which could potentially become self-reinforcing.

“Looking beyond the next few quarters, we are worried the credit cycle is turning from a virtuous circle to a vicious one. And like a snowball rolling down a hill, it will become larger and more powerful over time.”

With the credit cycle turning but core inflation starting to rise thanks to the tight labour market and a reduced drag from lower commodity prices, the US Federal Reserve could face a dilemma in 2017.

“This is the same problem central banks faced in 2007,” says James. “If they hiked rates, they exacerbated the credit crunch; but if they left rates unchanged, inflation would have got out of control.”

 

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