When will the music stop? Dating the global business cycle
26 July 2017
Understanding the business cycle is critical for investors. However, cycles are difficult to age with precision and economists have a poor track record of spotting recessions ahead of time. In the latest edition of Global Horizons, Senior Global Economist James McCann explains the analytical toolkit Standard Life Investments has developed to try and answer these difficult questions with more rigour. By creating business cycle indicators from a wide range of economic and financial data, we can get a better idea of the maturity of the current cycle. The results from the new business cycle indicators are encouraging.
Commenting on his research, James observed:
“The good news is that while the current cycle is getting old in terms of duration, it still has room to run in most economies, including the United States. Country level indicators provide us with useful insights. Interestingly, they currently highlight divergences across Eurozone member states, with Germany being flagged as more advanced in its cycle, while France, Italy and Spain are lagging with ample spare capacity. Previously, our indicators showed that the cycles in Brazil and Russia were entering their later stages prior to the subsequent recessions.
“Business cycles do not die of old age, rather they come to a painful end as a trigger forces the unwinding of financial and/or economic imbalances. There are reasons to believe the next global downturn could be onerous, making it even more critical to spot this well ahead of time. Our recession probability models currently suggest that the chance of a downturn is low over a three-month, one-year and two-year time horizon.
“This reinforces our conviction that the global economy will grow modestly above trend this year and next and that now is a good time for investors to extend their time horizons. However, we caution against complacency. Although monetary and financial factors are easy to capture in our framework, geopolitical factors are not. Overall, these tools make us confident that we can use them to assist with our asset allocation process over the course of an economic cycle.”