Could the flash recession already be over?

Flash recession investment
The fear experienced in the financial markets towards the end of last year is now beginning to turn into optimism.

After all of the doom and gloom that enveloped global share markets late last year, it is starting to look like the flash recession many feared was instead just a flash in the pan.

While it is true that the US market hit the 20% fall that usually heralds a bear market, the rapid recovery since then has proved that move was more an indicator of sudden volatility rather than the end of a long bull market.

Now that most of the US bear market and our own hefty market correction has been erased by rapid gains, why are share markets returning to a state of relative calm after such extreme volatility?

Temporary setback rather than recession

The answer could be that the few months of negative economic numbers that churned out in the latter part of last year and sparked fears of a synchronised global growth downturn were just a temporary setback rather than heralding serious economic troubles.

Flash recession Dow Jones 2018 2019 investment
The Dow recovering from the sell-off in late 2018.

Goldman Sachs chief economist Jan Hatzius and colleague Sven Jari Stehn think that the late 2018 downturn was a temporary problem, with Goldman’s current activity indicator showing that February was stronger than the downwardly-revised December and January numbers.

In a note to clients they said that the global economy may have already hit rock-bottom and be improving.

Green shoots starting to appear

“There are some signs we are moving past the bottom,’’ Hatzius and Sven Jari Stehn said in the client note.

“Some green shoots are emerging that suggest that sequential growth will pick up from here,’

The economists still think that global growth will still struggle to reach their forecasts of 3.5% for 2019 but that activity is on the rise after a temporary lull.

Mr Hartzius said tightening financial conditions in the US were easing and even Chinese growth was beginning to turn back up, with recent indicators “more encouraging than the relentlessly negative news of prior months.”

However, the pair acknowledged that it was a good time to remain wary on China because the Lunar New Year holiday would lead to less reliable data for January and February.

Strong Australian investment numbers

Their positive findings have been echoed here in Australia, with a much stronger than expected figure for investment on equipment, plant and machinery.

While mining and manufacturing investment were down as expected, investment at services companies was much stronger than anticipated and caused a rise of 0.7% for the December quarter.

That increase should positively add to Australia’s fourth quarter GDP and should also feed into higher 2019 GDP numbers if the future investment intentions are actually carried out.

Bullish investment by services companies were entirely responsible for the quarterly increase, overwhelming steep falls in mining and manufacturing investment.

Expected investment in the current financial year was revised higher, which will give the Reserve Bank some comfort that its long-predicted rise in business investment is underway and will help to underpin improved economic activity over the next few years.

The RBA’s forecast of 5% growth in business investment for the year is still within reach, with these estimates pointing to 4% higher spending this financial year compared to the previous one.

Mining investment set to improve

The first estimate for investment in 2019/20 rose to $92.1 billion, with some renewed confidence also shown by mining companies despite poor current investment numbers.

That figure was 11% higher than the first estimate offered for 2018/19, the current financial year.

According to the Australian Bureau of Statistics (ABS), private sector capital expenditure (CAPEX) rose by 2% in seasonally adjusted chain volume terms to $30.1 billion, well ahead of forecasts that it would increase by 1% and overcoming three quarters in which investment had fallen.

Compared to a year earlier, CAPEX rose by 1.9%, courtesy of strong investment in plant and equipment.

Stronger commodity prices are beginning to be felt in the predicted CAPEX numbers, with expected mining CAPEX jumping to $30.2 billion, up a hefty 21.4% from the same survey a year earlier.

Analysts said the investment numbers followed a set of weak numbers in other areas and renewed confidence that good economic growth figures around the 2.5% mark could be achieved this year.

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