CIBC: Slim odds on second recession

They may slow down but they won’t be double-dipping.

Through its Recession Probability Index, CIBC is predicting the economies of both the U.S. and Canada will slow in growth but the threat of a double-dip recession is unlikely.

“We’re not in material danger of a rude double dip in the next two quarters,” said Avery Shenfeld, chief economist at CIBC. “The probability estimate is likely more consistent with a slowdown rather than a true double-dip recession but, given the uncertainties, fiscal tightening ahead and the potential for a slow economy to be vulnerable to shocks, we will keep an eye on our new indicator nevertheless.”

Examining trends in a number of indicators, including credit spreads and interest rates, the Recession Probability Index is predicting the odds of another U.S. or Canadian recession occurring in the next six months is very low.

Although both consumers and investors alike fear another recession is on the horizon, Shenfeld says such instances are very rare. As far as the U.S. is concerned, he expects sluggish job growth will ensure the government will keep the stimulus taps open.

For Shenfeld, healthy corporate profits, strong market liquidity, steep bond market curves and tight corporate spreads are all signs that Canada and the U.S. will avoid a double-dip recession.

“Certainly, there are reasons for concern,” he cautions. “The U.S. economy has been propped up by fiscal stimulus that is now winding down. Job growth has lacked its typical post-recession vigour, leaving a household sector swamped with bad mortgages having few reasons to accelerate spending. But there is still a base of ongoing support coming from healthy corporate profits and a wide-open tap on monetary stimulus.

“That has us projecting a sharp deceleration in U.S. growth, but not an outright recession, with a similar fate in store for Canada.”

The complete CIBC World Markets Inc. report is available here.

(07/27/10)