The Bank of America announced that the risk of recession in the next year is now greater than 30 percent, after recent uncertainty surrounding the US-China trade relations.

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The latest data suggests that the escalation of the US’ trade war with China and the resulting market volatility have led to a fall in interest rates and major stock averages.

In a note to clients, BofA’s Head of US Economics Michelle Meyer said, “Our official model has the probability of a recession over the next 12 months only pegged at about 20 percent, but our subjective call based on the slew of data and events leads us to believe it is closer to a 1-in-3 chance.”

Meyer added that three of the five economic factors tracking business cycles – aggregate hours worked, auto sales, and industrial production – have reached levels seen right before previous recessions.

There were similar scares in 2012 and 2015, but they were not severe enough. “This time, we are worried,” said Meyer. The economy is now further into its record-long expansion, and thus more vulnerable to shocks, she warned, adding that growth will not be easy since the economy is back to maximum capacity.

US President Donald Trump announced new tariffs on almost all Chinese imports, a day after the Federal Reserve’s rate cute on July 31. In response, China allowed the yuan to fall below a crucial threshold against the US Dollar, which led to the biggest plunge in US stocks in 2019.

This trade war between the US and China, which has now surpassed a year, has increased the overall threat level of a global recession. Morgan Stanley believes if the economic war continues, the global economy would go into recession within the next three quarters, or nine months.

However, the investment bank stated that India, for now, will likely be untouched by the recession, even though its economy is undergoing a crushing slowdown. The core infrastructure and industrial production sectors have witnessed declines, and the automobile industry is on the verge of recession.

India’s economy has been on the downturn for three straight quarters, while the growth forecast is not uplifting, adds Morgan Stanley. Even though recession is not impending, policy makers must not ignore the possibility, and should begin to strengthen India’s economic barriers.

Michael Hartnett, Bank of America Merrill Lynch’s Chief Investment Strategist, suggested keeping an eye on two situations while staying optimistic through the third quarter’s end: China’s economy, and the trade war’s effect on key battleground states during next year’s Presidential election.

He provided a few contrarian trades for bullish investors: buy stocks that are global, cyclical, and high-dividend payers and “trim very overbought bonds”.

In addition, he recommended buying South Korean stocks – often a bellwether for the global economic situation – and betting against Treasuries.

Pointing out the upside of the situation, Meyer said the economy’s “bright spot” is that the level of initial jobless claims remains very low and is not sending a recessionary signal.

This comes just before the latest legislation on green cards, which allow non-US citizens to legally work and reside in the US. The new rule targets immigrants who lack financial resources, and are thus judged a burden on taxpayers.

An aggressive wealth test will determine whether immigrants have the means to support themselves. Poor immigrants, who will likely use government benefit programs like food stamps and subsidised housing, will be denied permanent legal status.

First Published:Aug 14, 2019 1:56 PM IST