Here are the top factors that could trigger a recession, according to Societe Generale

  • Global growth is expected to slow but remain solid over the next year.
  • But a recent string of disappointing economic data has raised concerns about the possibility of a recession.
  • Trade tensions and oil prices are among key factors to keep an eye on, according to analysts.

Economies are widely expected to slow around the world this year, including in the US. While economists still forecast a solid pace of growth in the near term, a recent string of disappointing data has raised concerns about the possibility of a downturn.

Take last week: the gap between short- and long-term government bonds inverted for the first time in more than a decade. Historically, inversion of the so-called yield curve has preceded recessions.

Here’s what recession watchers should look for in the coming months, according to Societe Generale.

The trade war

Feng Li/Getty Images

Societe Generale said a prolonged US-China trade war, which is in its eighth month and counting, would be at least in part a source of recession risk. Protectionism and the threat of further escalation are expected to continue to hurt growth.

As the Federal Reserve lowered its growth forecast for the economy last week, Chair Jerome Powell said tariffs were a “prominent concern” among business contacts.

An asset bubble bursting

US stocks have largely bounced back after posting their worst year since the financial crisis. But equities have still been identified as overvalued on many metrics, Societe Generale analysts wrote in a research note.

“Historically, equity markets peak a little more than six months ahead of the official recession date without consideration of valuation,” the analysts said.

A geopolitical shock

The Federal Reserve has cited geopolitical events such as Brexit and ongoing trade tensions while dimming its outlook on the economy. The Trump administration’s foreign policy strategy with nations like North Korea could also weigh on growth, according to Societe Generale.

“A permanent concern with an immediate threat,” the analysts wrote. “President Trump’s style might raise risks, while achievements are debated.”

An oil shock

Energy prices have moderated after jumping sharply last year, with Brent trading at around $US68 per barrel and West Texas Intermediate at $US59. But US sanctions against major oil producers, including Venezuela and Iran, could squeeze global supply.

Higher gasoline prices can deliver a blow to consumer demand and spending. Societe Generale said a booming shale industry, however, has helped put the US in a less vulnerable position than in the past. “There is at least a partial offset on the business side, thanks to rising US production,” the analysts said.

A Fed misstep

Taking note of slowing global economic growth, the Federal Reserve has signalled it would leave interest rates on hold the rest of the year.

But Societe General said additional hikes could be on the way if the labour market remains robust.

“Wages and a low unemployment rate could prompt faster Fed hikes, which in our mind would heighten the recession risks,” the analysts said. “Businesses would face rising costs, and still have limited scope to raise product prices.”

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