Recession Risk Dismissed

Despite turbulent financial markets and the broad-based deterioration in leading economic indicators over the past month, Invesco’s macro regime framework continues to dismiss recession risks at this stage, says Alessio de Longis, senior portfolio manager and head of tactical asset allocation at Invesco Investment Solutions. On the contrary, he suggests growth expectations are likely to improve from here, anticipating an expansionary environment in developed markets and a recovery in emerging markets following a decline to below-trend growth rates. Its ‘Macro Update’ shows equity, credit, and government bond markets around the world experienced meaningful underperformance over the past month, hit by a confluence of adverse developments. First, central banks continue to increase their hawkish tone in response to stubbornly high and rising price pressures, with inflation statistics still printing well above market consensus. Markets are now pricing a slightly restrictive policy stance in the U.S. and the UK, and a normalization of policy in the Eurozone back to positive deposit rates by year end. As well, the era of unconventional, ultra-accommodative monetary policy has effectively come to an end. Additionally, China continues to battle the spread of COVID-19 with renewed selective lockdown measures, which inevitably provide downside risks to growth and upside risks to inflation given their likely impact on local and global supply chains, transportation, and production channels. Finally, the conflict between Russia and Ukraine continues to impact market confidence as the threat of energy supply shocks to the European continent skews future outcomes toward the poisonous mix of additional downside growth and upside inflation risks.