A boutique investment firm has predicted the United States is unlikely to enter a recession based on changes in its deficit balance and level of government spending, however, the outlook is less positive for Australia.
Quay Global Investors principal Chris Bedingfield noted financial markets have shifted their concerns from inflation, which appears to be easing, towards fears of a potential recession, driven by slowing jobs growth and rising unemployment.
To that end, Bedingfield questioned the reliability of using unemployment data, specifically the Sahm rule, as a predictor of a recession in the US.
“We’ve seen these ‘perfect indicators’ before. In 2022, another so-called perfect indicator, the ‘inverted yield curve’, was expected to signal the next recession, which never materialised,” he said.
“In December 2022, we questioned the predictive power of the inverted yield curve, recognising that the once-in-a-lifetime pandemic, and the fiscal response to it, likely changed the economy to the point where many of the old economic rules no longer apply.
“Could the Sahm rule be another false alarm?”
Instead, he pointed to fiscal policy and deficit spending as better indicators of where the economy is headed, suggesting the US is not on the brink of a recession.
“Another recession indicator is the size and direction of the US federal budget balance. Although not perfect, the historic pattern appears to be that whenever the US deficit is reducing, there appears to be risks that the economy will either cool or enter a non-pandemic recession,” he said.
“With a US deficit tracking at 7.5 per cent of gross domestic product (GDP), neither accelerating nor decelerating, it suggests an economy muddling through. And with US politicians focused on the November vote, it is unlikely this cadence will change anytime soon.
“Based on this factor, it seems the odds of a US recession are pretty low.”
In contrast, he said Australia’s tighter fiscal policy and smaller deficit spending would likely lead to weaker growth, creating a less optimistic outlook.
“Despite the start of the stage-three tax cuts in 2024, the forecast federal deficit is expected to remain around 1 per cent of GDP over the next two years,” he noted.
“The result of an absurdly small deficit in Australia is already resulting in weak economic performance, with real per capita GDP growth posting negative growth for the last five quarters.
“Based on recent fiscal flows, the odds [of a US recession] seem low, however, using the same framework for Australia, the outlook is far less sanguine.”
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