Beware a 2019 recession

Some superstitious investors worry about the chance of a global recession in 2017. They figure that the stockmarket crash in 1987, Asian crisis in 1997 and start of the GFC in 2007 make this the obvious year for troubles in markets.  While it is difficult to find an economist that will forecast a recession, the maturity of the business cycle does warrant some caution.  However, first we need to see more signs of consumer price inflation. So 2019 may be the year to watch.   

Recessions can be caused by a number of different shocks to knock an economy off course.  But typically recessions occur as the culmination of a business cycle.

Economic expansions normally start with low inflation and low interest rates. Provided access to credit is plentiful, economic activity expands and asset prices become elevated.  Eventually the economy runs out of spare capacity and CPI inflation pressures start building.  Then, ultimately, central banks become concerned that CPI inflation will get out of control, prompting them to apply the brakes and tighten monetary policy forcefully (Figure 1).  The bigger the boom time; the sharper the correction.

Figure 1.  Typical economic business cycle