To assess recession risk focus on global markers

Our global outlook anticipates a slump in business sentiment related to geopolitical conflicts damping global growth this year, with a particularly significant hit to the goods sector. However, we also expect the expansion to weather the storm as private sector resilience, bolstered by easy macro policies, limits spillovers of this drag to credit and labor markets. Incoming data validate this view. While the drop in business sentiment has been sharp, slowing capex and factory output growth more than anticipated, global GDP growth held near potential in 1H19. Credit continues to flow normally and consumer spending gains have been strong as households benefit from solid job gains, rising wage growth, and recent declines in interest rates and oil prices.

However, drags are still building, testing private sector resilience. Business sentiment is at a seven-year low and trade tensions continue to intensify. Political flashpoints (notably Brexit) also loom large. With the growth in business capex and manufacturing activity nearly stalled in recent quarters, the potential for greater spillovers to labor and credit has increased. Our forecast rests importantly on a belief that credit conditions and labor markets bend but do not break. However, the risk is that businesses begin to reduce the pace of hiring more significantly and this then dampens consumer spending growth by more, which in turn feeds back into even softer business spending and tighter financial conditions.

JPMorgan