ZURICH • The search is on for clues to the next recession and the Bank for International Settlements (BIS) reckons it’s got a good one.
Sticking with the themes of risk, leverage and asset prices that have long obsessed the Basel-based institution, the BIS took a look at financial cycles. Based on its analysis, in a piece co-written by chief economist Claudio Borio, it said this is a better recession- risk indicator than the term spread out to three years.
The paper, in the BIS Quarterly Review, doesn’t offer an insight into what’s currently going on in the global economy, but its publication is timely.
With the current US expansion mere months away from becoming the longest in postwar history, and some indicators weakening, economists are trying to figure out how bad it could get in 2019. An inversion in part of the yield curve has sparked talk of recession risk, and Pacific Investment Management Co LLC said last Friday that signals are “flashing orange”.
But the BIS said that financial cycle proxies “generally outperform the term spread” in its analysis: “Given that financial cycles build up slowly, the corresponding proxies provide information about recession risk even at a three-year horizon. And when we run a horse race against the term spread — the indicator most widely used to assess recession risk — we find that they outperform the term spread.”