International UHNWs share a gloomy economic outlook, according to a new report out from J.P. Morgan Private Bank. Do they know something the rest of us don’t? Matthew Hardeman reports
Three quarters of global ultra-high net worth investors believe the US could be in for a new recession within two years, according to a new study by J.P. Morgan Private Bank.
Surveying more than 700 global HNW investors spread across Greece, Switzerland, France, Spain, Germany, Israel, Italy, and the Middle East, the bank’s Spring Investment Barometer found that of those expecting an American economic downturn, a fifth (21 per cent) of respondents believe this will begin in 2019, while half (50 per cent) think that the next recession could begin in 2020.
When probed on the potential for US interest rate hikes, nearly half of the investors contacted (47 per cent) expect an additional rate rise from the US Federal Reserve in 2018, following Jerome Powell’s first rise in March. Of the UHNWs contacted, two fifths (41 per cent) believe policymakers will increase interest rates another two times or more.
Anthony Collard, J.P. Morgan’s head of UK & Nordics investments said in a statement that while concern is clear among these UHNWs, the house doesn’t forecast a recession any time soon. ‘Until we see clear imbalances building, and policy approaching a point where it really constrains economic activity, we lean towards a view that the cycle will continue to expand,’ he said.
The survey is hardly a scientific indicator of whether a recession is near, says Andrew Hunter, a US economist at Capital Economics. After all, no economic model is particularly good at forecasting recessions. And when trouble does come, it tends to unfold rather quickly.
He offers an explanation for the panic: ‘There is possibly a general sense that the current expansion [of the economy] has been going on for so long that we are due a recession.’
That’s not to say the economy is unlikely to slow down, however. The US is currently enjoying fiscal stimulus through Trump’s tax cuts, which were agreed in December last year, and more recently from the deal to raise domestic discretionary spending. By 2019, tax cuts are unlikely to be having an effect. Spending is also set to increase only modestly in 2019, following the relatively sizeable increase this year.
‘We think the Fed is going to raise interest rates a little faster than the market expects, based on our view that strong growth this year is going to result in a continued rise in inflation,’ says Hunter. ‘That combination of the fading fiscal boost and higher interest rates starting to take their toll is likely to cause growth to slow.’
Meanwhile, a trade war with China remains a ‘downside risk’ (‘assuming that there will be no further massive escalation’): ‘Total US exports to China are worth less than 1 per cent of G.D.P – so even if both sides follow through with tariffs and there is a big escalation, I don’t think that’s going to be enough to cause a US recession.’
As Hunter explains, the nervy sentiment seems to be more about where we are in the business cycle: ‘The unemployment rate is at a 17-year low. There doesn’t seem to be much spare capacity left in the economy – and especially with this fiscal stimulus this year. In that environment we would expect inflation to start to rise, and for the Fed to raise interest rates slightly more aggressively – and that has tended to precede a lot, if not most recessions.
‘It’s possible that a similar thing will happen again – but I don’t think that just because the expansion has been going on for so long, that that is in itself a reason to expect a recession.’
Some wonder if a US recession would even matter, in a world where economies like China offer heady growth. But even a relatively mild US recession is likely to have a global impact – particularly in countries like China and Germany – export-dependent economies (particularly exports to the United States) to which investors might otherwise flee. The Chinese have succeeded in reducing their dependence on exports as a percent of GDP in recent years – but they still rely on them heavily for their economic gusto in 2018.
Likely or not, it will be interesting to see whether these global UHNWs have a finger on the world's pulse like they think they do, or if they are just as susceptible to a case of the creeps as everyone else.
Matthew Hardeman is Senior Researcher at Spear’s