Figure 1: Latest sentix survey suggests incoming economic data could disappoint

If geopolitical stress endures and food and energy prices continue to climb global recession risks will surely rise. The latest sentix survey, published earlier this week, certainly suggests growing alarm about this potential outcome amongst global investors. The forward looking expectations index, for example, from the global survey slumped (to -8.8 in March from +14.6 in February) largely thanks to a plunge in European confidence but also because of sliding confidence in other major regions. This survey is more forward looking than most. And as the chart above suggests it points to a flurry of disappointing global economic data in the immediate weeks ahead.

A key issue that investors will be mindful of in gauging recession probabilities concerns the interplay between financial instability and economic instability. Most recessionary phases, after all, are preceded by heightened financial market stress.

A useful indicator to monitor that stress is the Office of Financial Research’s global financial stress index. As the chart below suggests this has crept up into “stressed” territory in recent days thanks to heightened volatility and generic weakness in global equity and credit markets. While the index is not yet in “recession” territory it certainly bears watching closely in the days and weeks ahead.

Figure 2: The OFR index has climbed into stressed territory

Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.