Next global downturn will be 'onerous', warns Standard Life economist

Lucy White
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The UK's current estimated recession risk is low, according to Standard Life (Source: Getty)

Although the previous financial crisis may still be fresh in many people's minds, it may be time to start looking to the next, according to a report from Standard Life Investments.

The asset manager studied business cycles across the world to understand better where economies are in their lifecycle, with a view to spotting recessions ahead of time.

Read more: Standard Life prepares to flog £16bn annuity book once Aberdeen deal is done

Although the results were “encouraging” for the most part, implying that the global economy would “grow modestly this year and next”, Standard Life has warned against complacency.

“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,” said Standard Life senior economist James McCann.

“There are reasons to believe the next global downturn could be onerous, making it even more critical to spot this well ahead of time.”

Current estimated recession risks in the US, UK, Germany and Japan are low, according to Standard Life's modelling framework for forecasting recessions.

Yet trouble could be closer than it looks. The report found a one standard deviation fall in the normalised year-on-year return of the Standard & Poor's equity index (equivalent to a 16 per cent decline in the index) would alone raise the probability of a recession on a three-month horizon by 20 per cent.

In terms of economic cycle, the report found that the US was more “middle-aged” than mature, with the eurozone cycle a few steps behind due to its later recovery from the sovereign debt crisis-induced recession in 2013.

There were imbalances within the Eurozone area, as Germany flagged as even more advanced than the US with a tighter labour market and larger housing imbalances. In contrast, the Spanish, French and Italian cycles are lagging.

Standard Life noted that it thought the Brexit vote might be enough to interrupt the UK's cycle, but found this was not the case.

Growth remained strong in the second half of 2016 and has only slowed modestly in 2017 so far, which the report ascribed to few economic and financial imbalances on the eve of the referendum “increasing the economy's resilience”.

Read more: Growth will be faster than expected but UK needs economic reboot from government says accountancy body

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