Why a US recession in 2019 is unlikely

US markets have endured a difficult ride of late with both equities and bonds suffering sizeable losses. After hitting a record high on 3 October, the S&P 500 index of US equities had lost nearly 17% of its value by 3 January.

However, investors should be wary of reading too much into recent developments. We see little prospect of anything more than a modest slowdown in growth and minimal risk of a recession in 2019.

While economic data and financial market conditions are clearly linked, this connection may not be as close as some claim. Relying on market indicators such as falling equity markets to predict recessions is dangerous. While economists may not be particularly good at forecasting recessions more than a quarter or two in advance, it’s unclear financial indicators are much – if at all – better.

Additionally, although higher borrowing costs are likely to take some steam out of the economy in 2019 and beyond, there appears little cause for alarm based on current economic data.

That’s not to say there aren’t risks, such as the possibility of the US/China trade war escalating and potentially dragging in other nations. Yet even in a worst-case scenario whereby punitive tariffs are imposed, it’s hard to envisage this being enough to push the economy into recession. This scenario also assumes Washington doesn’t take steps to cushion the economy from the impact of any further tariffs.

Another risk to growth comes from the possibility that investment in mining and oil exploration contracts as sharply as it did in 2014. Should oil prices fail to recover from recent falls or worse still, the sell-off intensifies, this is a possibility. But it’s difficult to see this subtracting more than 0.3 percentage points from growth in 2019.

Some concerns have also been raised about a recent plunge in residential real estate investment. But these household finances are improving while this sector now accounts for little more than 3% of the economy. Even if activity falls further, this is unlikely to trigger a recession.

Others have talked about an excessive build-up of corporate debt in non-financial sectors of the economy. But again, with companies having taken advantage of low long-term interest rates on offer in recent years, this isn’t currently a cause for concern. Banks appear to be in a much healthier shape than in the run up to the financial crisis of 2008. That’s important given the central role they play in the economy.

Growth is ultimately expected to remain healthy in 2019 and it’s difficult to envisage a recession. While in theory there is a risk falls in financial asset prices trigger a recession as people feel less well off, markets would need to fall significantly further for this to happen.

For now, we expect the US Federal Reserve to continue raising rates through 2019. However, the central bank could pause or even stop hiking rates if the economy deteriorates. That provides further reason to not expect a recession in 2019 and to be wary of those trying to read too much into recent market events.

Market data source: Bloomberg

michael grady


Head of Investment Strategy and Chief Economist

Joined investment industry: 1999
Joined Aviva Investors: 2015

Main responsibilities

Michael is Head of Investment Strategy and Chief Economist and is responsible for formulating our ‘House View’ and the risks to that view, as well as overseeing the SIG process for the AIMS funds. Since joining Aviva Investors as Senior Economist and Strategist, Michael has been responsible for monitoring and analysing global macroeconomic, market and policy developments, and plays a key role in our House View and SIG processes.

Experience and qualifications

Prior to joining Aviva Investors, Michael was senior economist at COMAC Capital Llp, a global macro hedge fund, where he was responsible for the fundamental analysis used to inform the investment process. Prior to this, he spent a decade at the Bank of England in a variety of senior roles, latterly as a Senior Manager in the Markets Directorate. He began his career at the Australian Treasury.

Michael holds a BEc (Hons) from Macquarie University, Australia.