Risk of US recession at 50pc, says economist Tim Toohey

The risk of a slowdown in the world’s largest economy is high but Australia could end the year looking more resilient than the rest of the developed world.

Tim Toohey, head of macro and strategy at Yarra Capital Management. Picture: Paul Jeffers.

The risk of a recession in the US this year is now as high as 50 per cent, according to one of the nation’s leading economists.

But Australia will escape the same fate to instead end the year looking more resilient than the rest of the developed world, Yarra Capital Management’s head of macro and strategy, Tim Toohey, told The Australian.

Amid an uncertain outlook, Australian equities would offer the best returns in the near to medium term, while a balanced portfolio that included a portion of fixed income was starting to look more appealing, he said.

“The US is going to slow down quite sharply in the back half of this year,” he said.

“You’ve got this broad-based tightening of financial conditions already and a Federal Reserve that’s so far behind the curve that they’re going to be hitting the economy even when the data is (showing) a slowing.

“That’s going to be somewhat problematic. I think the odds are as high as 50 per cent for a recession there.”

His prediction is significantly higher than market expectations, with surveys of economists putting the probability of a recession within the next 12 months at about 25 per cent.

Mr Toohey, who was previously chief economist at Goldman Sachs, does not see a global recession looming, but a slowdown in many parts of the developed world was likely, he said.

“Global growth forecasts were already too high for this year,” he added. “The (European Central Bank) was looking for growth of 5 per cent for Europe this year. They’ll be lucky to be positive post the Ukraine war.

“There’s also downgrades in store for the US and there’s not really a strong prospect of a big bounce in Asia either. It might not be a global recession on traditional metrics, but it will feel pretty sluggish by Christmas.”

Australia’s outlook was brighter, in part due to strength in commodity prices, he said.

“We’re in that fortuitous ­position where our own financial conditions are just not tight­ening anywhere near as much (as elsewhere) … It’s that ­enormous positive national income shot from commodity prices that again saves the day for Australia.”

Even in this positive scenario for Australia, there were elements of the outlook that were too optimistic, he cautioned.

“We think housing construction will be weaker than what most people expect,” he said.

“We think the consumer is in this interesting little squeeze at the moment … cost pressures are clearly rising, interest rates are rising and house prices will level out. So you’ll find the baton will shift from discretionary spending pretty quickly into the back end of the year.”

The market is tipping the Reserve Bank will hike eight times in the coming cycle but Mr Toohey sees that an unrealistic, with three hikes looking more likely.

In turn, equity markets were in for a “pretty choppy” ride for the rest of 2022, with defensives faring better than cyclicals, he said. “Think about it as which sectors and companies are going to be able to deliver sustainable dividends and capital protection.

“It’s going to be a little bit different than last time because resources can fit into that bucket this time around, which normally wouldn’t be the case.

“Investors should be thinking about how their portfolio will stack up as interest rates rise while growth is slowing.”

For the first time in a while, a balanced portfolio was an attractive prospect, he said.

“Local investors and retail investors in this country don’t really have a lot of fixed interest and bonds, but it’s reasonable for them to actually think about adding some of those as we move through the middle of the year.”