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Good news, we’re not heading for recession: Here’s why

The experts don't think we're headed for a recession. Source: Getty

Over the past two weeks, the Australian stock market has taken multiple hits off the back of overnight drops on Wall Street.

US stocks tumbled as trade tensions between the US and China continued to spook equity investors, and many wondered whether we would head for a recession.

But while some indicators, like the weak stock market and the inverted US yield curve, pointed to yes, President Donald Trump’s top economic advisor, Larry Kudlow, and Aussie economists say there’s no recession in sight.

"No, I don't see a recession," Kudlow recently told reporters. "We're doing pretty darn well in my judgment. Let's not be afraid of optimism."

And, Kudlow’s statement echoes some good news on Wall Street: US stocks rebounded at the end of last week as an ebbing bond rally and news of potential German economic stimulus brought buyers back to the equities markets.

The Dow Jones Industrial Average rose 306.62 points (1.2 per cent) and the S&P 500 gained 41.09 points (1.44 per cent), posting 32 new 52-week highs.

All major sectors of the S&P 500 closed firmly in the black, with industrials, technology and financials enjoying big percentage gains.

Does this mean the US is safe from a recession?

Indicators like the inverted US Treasury yield curve just reflect the pessimism of investors, not that we’re headed straight for a recession, economist Jim Stanford told Yahoo Finance.

“It reflects pessimistic assumptions on the part of big financial investors about medium and longer-run economic prospects,” he said.

“That leads them to put more money into safe government bonds, which drives down their yield – so far that it falls below the yield on short-term bonds.”

And the President of the US agrees that these indicators aren’t anything to sweat over.

Trump recently told reporters US consumers were “loaded up with money” due to his “tremendous tax cut”, and Kudlow said consumers were seeing higher wages.

Low interest rates should also help the US housing, construction and auto sales sectors, according to Kudlow.

But while Kudlow and Trump are spruiking a safe economy, others aren’t so sure.

The US Federal Reserve cut rates for the first time since December 2008 during the depths of the global financial crisis, and Chairman Jerome Powell expressed concerns about the consequences of Trump’s trade war and sluggish economies overseas.

Is Australia safe from a recession?

The ASX has rallied today after a positive lead for overseas at the end of last week, with the S&P ASX 200 benchmark up 53.9 points (0.84 per cent), which could mean the worst is over.

But even if the US falls into a recession, Stanford told Yahoo Finance that alone wouldn’t throw Australia into a recession too - it would have to be worldwide.

But Germany’s coalition government is willing to suspend its ‘balanced budget rule’ and take on debt, meaning Europe’s largest economy could steer itself away from recession and cooling worries over a global economic slowdown.

Those stimulus hopes helped the benchmark 10-year US Treasury yield rise from three-year lows, after last week week saw 10-year yields dip below those of two-year notes.

That’s a step in the right direction to avoid an international recession, but Stanford did warn if there is an international recession, Australia will most certainly be caught in it.

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