Staving off an economic double-dip

Negative feedback loops and poor investor sentiment are the main reasons behind the dramatic falls in share markets over the past few weeks, but the global economy should avoid slipping back into recession, according to Credit Suisse head of strategy, thematics and portfolio analysis Michael O'Sullivan.

Recent falls in global equity markets are on a similar scale to the falls beginning in April, last year, O'Sullivan said. However, whereas the falls last year took three months to reach their trough, "we've done all of that in about two weeks", he said.

With the caveat that equity markets sometimes overestimate the likelihood of recessions, O'Sullivan said most indicators painted a grim picture.

"If you look at Treasury prices, if you look at the price of gold, if you look at equity prices they are reflecting recession-type levels. So the equity market is saying we're going to have a 25-30 per cent fall in earnings," he said.

However, O'Sullivan said Credit Suisse believed "we're going to see a slowdown in growth, not a double-dip". The current expansion period is in line with other historical episodes, and the recent falls in stock markets are not unusual in that context. The median post WW2 expansion period for the US is 52 weeks, O'Sullivan added - whereas the current expansion period is only 26 weeks old.

The biggest problem is poor sentiment, and the possibility of investors talking themselves into a recession, he said. He pointed to Internet searches for the keyword 'double-dip', which he said had just reached an all-time high and historically had a reasonably strong inverse relationship with global equity markets.