Global recession on the cards but rebound likely


Aviva Investors expects global growth to slow to a below-trend pace over the next 18 months, with the risk of recession rising close to 50%.
But the absence of major imbalances and excesses that have characterised previous downturns implied that economies should be able to rebound quickly.
Central banks in developed economies had either raised policy rates already, or signalled their intention to do so, signalling that taming inflation was now the priority, even if that had an adverse impact on short-term growth.
Inflation should fall back later this year and more convincingly in 2023, according to Aviva, but upside risks remained as earlier headwinds to price increases had become tailwinds: unwinding of globalisation, geopolitics, global supply chains shifting closer to home and climate change policies.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “The new macroeconomic environment, the monetary policy response to it and the changing views on a range of longer-term structural factors have resulted in an extremely challenging year in financial markets.
“The heightened uncertainty around the outlook has increased both implied and realised volatility across all asset classes. As such, we prefer to have relatively light exposure at this time. We continue to have a preference to be modestly underweight duration, with upside inflation risks outweighing downside recession risks.
“Given the sharp fall in equity multiples this year, we prefer a small overweight to the asset class, apart from in Europe, where growth risks are more pronounced. We prefer to be neutral in credit, where the pricing of spreads fairly reflects recession risks. In currencies, we are long the US dollar against the Euro, given the relative outlook for the two economies.”
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