Tuesday, May 17, 2016

Economy: Why A Recession 2016/17 Is Unlikely

(Drivebycuriosity) - There is a lot talk about an allegedly coming recession in 2016 or at least in 2017. I think that the risk of a recession is very low in the moment.

Recessions are usually caused by:
spiking oil prices like in the 1970s and early 1980 (Opec oil embargo), 1990/91 (Kuwait war) and 2007/08 (when oil prices almost tripled from $60 to $146);
an overheating economy with overinvestment and overcapacities like 1999/2000 (Internet) and 2008 (housing crisis)
and by the Federal Reserve, who hikes interest rates sharply to break inflation expectations  (federalreserve).

None of these risks is imminent.

1.  Oil is still cheap and far below the $140 zone which was one the reasons for the sharp recession 2008 (econbrowser). Yes, oil prices are spiking again, but the rise started on a very low level (below $30). I think that the current rally (about plus 70% since February) will not reach $100 and beyond. Oil prices will stay below $100 because Iran returned to the oil market and the US oil producers (frackers) will come back when prices climb above their costs which are below $100 and sinking thanks to the technological progress (oilprice).

2. The US - and even more the global - economy is far away overheating. There are no significant overinvestments and overcapacities. There is no boom which could lead to a cyclical bust.

3. Inflation - and inflation expectations - are low. Even if the Fed hikes her interest rates in the course of the year they would do that moderately because there is no risk of an overheating economy.

The chances are high that the US and the global economy will continue the slow growth of the recent years. The US economy mastered a lot headwinds since 2009 without falling into a new recession. There is no reason why this should change in near future.

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