Britain is extremely unlikely to face an economic recession over the next two years and is on safer ground than any other major country in the developed world, according to a new crisis-study by Goldman Sachs.

The US investment bank said the global stock market rout and the credit tremors this year are sending off false signals, insisting that underlying indicators of economic health show little sign of a sudden rupture in Europe, the US or across the OECD bloc of rich states.

An array of “alarm” indicators - based on the experience of 20 countries since 1970 - suggest that the current business cycle is still in full swing and far from exhaustion, even if risks have been ratcheting up over recent months.

Credit ratios are high but they have not been spiking higher in most OECD states, and there is still plenty of slack left in the economy. This allows central banks to take their time before having to slam on the brakes – the time-honoured cause of recessions.

Jan Hatzius, Goldman’s chief US economist, cited a string of episodes where markets were gripped by fear and emotion yet the storm passed without doing much damage.

These included the 1987 stock market crash, the 1994 bond rout, Mexico’s Tequila crisis, the failure of the giant hedge fund Long-Term Capital Management and the Asian crisis in 1998, the corporate credit squeeze from 2002-2003 at the onset of the Iraq War and the eurozone sovereign debt crisis.

“In each case, at least some financial markets were priced for significant recession risk, if not an outright slump,” he said.

Yet Goldman cautioned that it would be a “grave error” to ignore the latest market tantrum altogether. The US Federal Reserve was able to slash interest rates and flush the international financial system with liquidity to weather the 1987 and 1998 storms, something that would be much harder to pull off today.

Mounting worry over China – and its linkages through the commodity nexus - has put everybody’s nerves on edge this time. “Financial markets now signal a high probability of another recession. High-yield spreads are at levels almost never seen outside of recessions,” said Mr Hatzius.

David Fuller's view

Here is a PDF of AE-P's article.

I would have backed this Goldman Sachs view had it been issued in December 2015.  However, the worst start to a year for many stock markets is more than a market tantrum in my opinion, and the rout continues. 

Yes, we had a stock market crash in 1987, largely because Wall Street was overbought, central banks were raising interest rates and most importantly, institutional investors were complacent because stock market futures contracts had recently been introduced. 

Consequently, investment managers were less worried about a market downturn, believing that they could immediately hedge their portfolios without having to sell a single share.  Unfortunately, after a week of selling everyone tried to hedge short on the same following Monday morning in October 1987.  When the US stock market finally did open after a considerable delay, it did so at crash levels.  Investors in other markets around the global panicked, leading to similar crashes.  Many commentators predicted a global depression but economies were barely affected.

While today’s circumstances are obviously different than in October 1987, Goldman Sachs presumably does not see a repeat of factors which usually trigger recessions.  This may be true, and certainly is in terms of central bank action.  Nevertheless, I am particularly concerned about selling by sovereign wealth funds – mainly those of previously wealthy oil producing states – which we have never seen on a similar scale.  This does not ensure that recessions follow, but it certainly increases the risk at a time when most economies are far from robust.  There are obviously other concerns as well.