It’s Going To ‘Feel Like A Recession’: One Bank Thinks The Die May Be Cast

Everywhere you turn, somebody is talking about a recession, either in the US, abroad or both.

Since the onset of the trade war early last year, economists and analysts have variously warned that sooner or later, rolling back the clock on globalization and deliberately undermining decades of progress on trade openness would dead end in a global economic slowdown.

That kind of economic doomsaying wasn’t (and isn’t) welcomed by those who’ve capitalized off the rise of populism in western democracies, but the bottom line is that no matter what your take on globalization, severing supply chains and attempting to rewrite the rules of global trade and commerce virtually overnight is an endeavor that is almost guaranteed to produce short-term pain even if you want to persist in the (likely false) narrative that ascendant nationalism will somehow be a good thing over the longer haul.

(The IMF slashed its outlook for global growth for a fourth time in nine months in July to the lowest since the crisis) 

For now, the services sector is holding up ok in locales that are beset with manufacturing woes, and the US economy continues to shake off the global malaise, but with each passing month, the data seems to worsen on one front or another, whether it’s a contraction in Germany, collapsing exports in Singapore or a flat-lining economy in Hong Kong.

One place where economic optimism is not running high is BNP.

“In what seems to be becoming a statistical regularity, those returning from summer holidays have had a bit of a shock, with the global outlook left looking decisively gloomier by escalating US—China trade tensions, the Argentina crisis, unrest in Hong Kong and renewed Italian political jitters”, the bank writes, in new global outlook update.

BNP says that we can already draw a pair of “key conclusions” as the summer winds down. The first is that trade tensions aren’t going to abate and in fact, will probably get materially worse.

“The tough negotiating tactics pursued by the US and the extent of its demands appear to have closed the door to a short-term deal”, the bank’s strategists write, adding that although “both parties would probably still prefer a deal to no deal, the conditions required for that outcome look incompatible, even with the recent US announcement of a postponement of some tariffs until December”.

The inevitable result from ongoing Sino-US tensions will be a further blow to trade and confidence, “with an additional drag on global growth”, the bank cautions.

(BNP)

The second conclusion is simply that the events of the past two months have underscored an “already sober” take on the outlook for global growth.

“We have long argued that markets and central banks were underestimating downside risks and that chances of a recession were higher than generally perceived”, BNP reminds you, before lamenting that “if anything, recent news flow has been worse than we had anticipated and generally call for downward revisions to our already below-consensus growth forecasts”.

(BNP)

As far as whether we’ll actually see a “recession” in the technical sense, BNP thinks that might be the wrong way to think about things.

“Whether our updated forecasts will amount to a global recession is a question of definition”, the bank says, on the way to noting that “we think the overall picture will feel like a recession, and we expect data in the short run to do little to assuage market concerns that that’s where the global economy is heading”.

On the question of policymaker response, BNP thinks at least some market participants will be skeptical of central banks’ promises to do what’s necessary to reflate. Investors may come to believe that “monetary policy might have diminishing marginal returns”, the bank warns, before asking, on your behalf, “If [monetary policy] didn’t work the first time, why should it work the second”?

Good question. And in the absence of a coordinated global fiscal push, perhaps the only one that matters.

Read more: As Ray Dalio Puts Recession Odds At 40%, Here’s A Chart Trio And A Message From Kudlow