Economy on alert: US yield curve inverts

US yield curve invertsUS yield curve inverts

Keith Wade, chief economist at Schroders │ The yield curve has been a reliable element in the prediction of US recessions over the last four decades. With only one exception, every time the curve has inverted, the US economy has entered into recession within 18 months.

The fact that the curve has inverted could indicate that, in the best of cases, that investors expect the economy to slow down. In the worst case it indicates that a recession could be on the way.

The curve has inverted in the US and is on the point of doing so in the UK. The US curve is a reliable indicator of recession, although the UK curve is less so. Nevertheless, if the US enters into recession it is unlikely that other countries will not follow, given its importance as the motor of the global economy. Thus the double signal is important. Normally there is a delay of approximately a year between the inversion and the recession. So the curves are a sign of problems for 2020.

That said, the UK has sufficient problems in the short term, with a contraction of its economy in the second quarter of 2019 and the prospect of a no deal Brexit in the fourth quarter of 2019.

The yield curve is suggesting that any recovery in growth in the UK after Brexit will be of short duration, which calls into question the government´s general election strategy as well as that of the Bank of England, which continues to hint at an increase rate hike.