Tina Adatia: What are these seven macroeconomic themes, and how do they stack up in terms of risk for growth and markets?
Joachim Fels: The first theme is that time to recession has increased. What do we mean by this?
Well, the recession this year now looks less likely than it looked, say, in the summer of last year when the yield curve had inverted and when markets got worried. So we're now more confident in our baseline forecast that we will see a modest global economic recovery in the course of this year.
Second theme is that, while time to recession has increased, so has the loss given recession. So if and when we see a recession eventually, we think it could be deeper and/or longer than your garden variety recession.
Then the third theme is — are the potential cracks in the corporate credit cycle. This is something that we discussed a lot at our December cyclical forum. We worry about vulnerabilities that are building up on corporate balance sheets, given the increase in leverage that we have seen in the course of this expansion.
Theme number four is a more upbeat one. It's about housing strength, particularly here in the US. We see the housing market as an area of strength for the economy.
Theme number five is about the global cycle. So we think that the world leads and the US lags. So just as global growth led US growth on the downside in the course of last year, we think this year we'll probably see global growth picking up before US growth finally turns and starts to move higher.
Then theme number six, inflation. So our baseline outlook is relatively benign, but we think that there are more upside risks to inflation than there are downside risks. And we think markets will increasingly start to focus on these upside risks in the course of this year.
And then seventh, but not least, dealing with disruption. That's a familiar theme to many of our viewers and our clients, because that was the title of our secular outlook last year. And we think this year will, again, be very much about dealing with disruption, particularly from politics and from geopolitics. So think about China-US, think about the US-Iran conflict, think about the upcoming elections in the US. We think this will continue to be a big focus in the course of this year.
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