Recession Resistance!
Author: Tom McGrath, CIO, 8AM Global
US Economy
I recently heard a pundit describe the scope of the US economy and markets on the world stage as being reduced to ‘exceptional’ rather than ‘hyper exceptional’. Whilst the US remains a fundamental global player, the narrative is gradually shifting surrounding its status as a simple ‘safe bet’, as has been assumed for the last decade or so. With that in mind, before diving into my usual review of the week’s events, I thought I would take some time to reflect on the health of the US economy as it relates to the chances of recession and, therefore, the start of a significant bear market trend. So, it’s worth asking whether the current volatility is a warning of a downturn or a tariff-induced wobble in a still-resilient expansion?
The sharp repricing triggered by Trump’s ‘Liberation Day’ tariffs has understandably fuelled fears of stagflation or worse, especially as consumer sentiment indicators have dipped and some forward-looking economic data have softened. But the case for a recession, while louder than before, still remains unlikely in our opinion.
Historically, bear markets tend to occur when recessions are already underway or imminent. That’s when the full toolkit of market damage comes into play: falling revenues, contracting profit margins, declining earnings, and compressing valuation multiples. It’s the combination of all four that typically drives sustained equity declines. The notable exceptions, like 1987, driven by valuation extremes and portfolio insurance dynamics, and 2022, driven by multiple compression amid rising interest rates, stand out precisely because they lacked a concurrent earnings collapse. In most other cases, recession and market downturns have gone hand in hand.
That’s why the question of whether we’re heading into a proper recession matters so much at this moment. If this turns out to be another false alarm, then the correction we’ve seen already may end up looking more like 2022; painful, but ultimately short-lived, rather than a precursor to a deeper, earnings-led drawdown. It all hinges on whether growth holds up and whether companies can maintain margins in the face of higher input costs, shifting global trade dynamics, and fading pricing power.
For one, the (previously hyper exceptional) US economy has defied gloomy forecasts for years. The much-heralded recession never arrived during the Fed’s aggressive tightening campaign, and the latest scare may follow a similar script. Just as in 2019, there are signs that Trump is calibrating his policy response to the market’s mood. His recent decision to ease AI chip restrictions and delay reciprocal tariffs for 90 days shows an awareness that hurting Wall Street risks damaging Main Street alongside Republican prospects in upcoming elections.
Meanwhile, the Fed remains equipped with lots of options should policy support be needed. With interest rates still over 4%, Powell has room to respond decisively if growth falters. Odds of a tariff-induced recession spiked in April, but they’ve eased slightly as strong April jobs data and a rebound in equities suggested resilience. A recession remains possible, but not probable.
More importantly, the foundation of the US economy remains intact. The labour market continues to show strength, particularly in sectors linked to services and ageing demographics. Consumer spending, bolstered partly by robust earned income data and wealth effects from rising asset prices of the last two years, remains just about intact. Crucially, the gradual trickle-down of wealth from Baby Boomers, a phenomenon still underappreciated in macro forecasts, is cushioning demand and supporting consumption in sectors like healthcare, leisure, and housing.
I hope Trump will aim to declare victory on trade in the coming months, stringing together enough bilateral deals to justify further postponement of the most damaging tariffs. With litigation mounting against his tariff authority and political pressure rising, the path of least resistance is likely to be one of de-escalation. If Republicans manage to pass new tax cuts after the midterms, a possibility that’s gaining very real, but quiet traction, it could reinforce the economic floor into 2027.
So, while it’s tempting to draw parallels with previous bear markets, this one still lacks the defining trait that makes corrections endure: a true recession. Policy remains flexible, household balance sheets are relatively healthy, and the political will to avert deeper pain is there, albeit clumsily expressed. We may yet skirt the downturn and come out stronger, provided volatility continues to serve as a check, not a catalyst.
Federal Reserve Meeting
So, what do J Powell and his buddies at the Fed think? Their statement this week was hardly subtle as they acknowledged that ‘the risks of higher unemployment and higher inflation have risen’ since the last meeting, which, crucially, predates the April 2nd ‘Liberation Day’ tariff announcement. Yet Powell’s clearest message was also his most cautious: the Fed will wait and see. With markets still trying to parse the eventual impact of tariffs on employment, inflation, and business behaviour, Powell has little choice but to hold fire for now. Unsurprisingly, the odds of a rate cut next month have dwindled to just 20%, though futures markets are still confidently pricing in three cuts by year-end…
And yet, for all the Fed’s handwringing, markets found their cues elsewhere. Late-breaking headlines that the Trump administration was lifting restrictions on chips used for artificial intelligence moved equities far more than anything Powell said at the podium. Once again, tech and tariffs have proven the dominant macro drivers, with the Fed increasingly relegated to the role of cautious bystander.
One of the more striking and underappreciated developments in recent weeks is the collapse of the oil price. Crude has tumbled to its lowest levels since early 2021, a fall which typically feeds directly into lower inflation expectations. This time, however, bond market inflation breakevens have barely budged. The fall in oil should, in theory, provide a welcome offset to tariff-driven cost pressures, but the relief has been strangely absent so far. Meanwhile, falling crude prices are squeezing drillers and eroding the incentives for fresh production, a dynamic that Saudi Arabia and OPEC+ appear content to tolerate. Adding to the puzzle, petrol prices at the pump have been sticky, leaving US consumers waiting for the eventual trickle-down from cheaper oil.
On the productivity front, the US saw a slight dip in Q1, with productivity falling at an annualised rate of 0.8% and unit labour costs rising by 5.7%. But the headline numbers mask a noisy quarter distorted by trade swings, and underlying productivity growth remains solid. Year-over-year productivity growth held a respectable 1.2%, and the four-quarter average came in at a still-strong 2.2%, roughly in line with the pre-COVID trend. I remain firmly in the camp that Artificial Intelligence will boost productivity over the coming years as companies work out how best to use it, but it hasn’t shown up in the data.
United Kingdom: Cautious cuts and clouded consensus
The Bank of England delivered its long-anticipated rate cut this week, but the message around it was anything but straightforward. As expected, the MPC voted to lower the Bank Rate by 25 basis points to 4.25%. But the decision was narrow, with the committee splitting 5–4 and revealing the sharpest divergence in views we’ve seen in this cycle. Two members backed a larger 50 basis point cut, while two preferred to keep rates on hold entirely. That kind of fragmentation underscores just how uncertain the outlook remains.
What caught markets off guard was not the cut itself, but the tone. The minutes made clear that for many on the committee, the decision to ease was finely balanced and might not have happened without the backdrop of Trump’s tariff upheaval. The phrase ‘gradual and careful’ was retained in the forward guidance, suggesting the Bank isn’t yet ready to accelerate easing. Gilt yields rose sharply after the release, with two-year yields up 16 basis points by Thursday’s close.
In terms of forecasts, the Bank still looks surprisingly optimistic. Growth projections were revised up modestly for this year, buoyed by historical data revisions and stronger first-quarter activity. The 2026 forecast was only slightly lower, with the committee assuming much of the tariff-related drag would be offset by easier financial conditions and cheaper energy. But that forecast still looks more upbeat than the consensus and our own view.
The inflation picture was more dovish. The near-term forecast has been revised down, reflecting a firmer pound and lower oil and gas prices. Further out, the Bank sees slightly more economic slack emerging and now expects inflation to undershoot the 2% target at the two- and three-year marks. That implicitly endorses the recent shift lower in market rate expectations, even if the commentary itself pushed back on the idea of faster cuts.
In short, this was a cut wrapped in caution. The committee remains divided, both on how to respond to the tariff shock and on how sticky domestic inflation might prove over the coming quarters. With national insurance hikes and wage floor increases still working their way through the system, volatility in the data could keep the MPC on its heels. Despite this, I still expect further easing in August and November.
Meanwhile, the UK government announced draft trade agreements with India and the US. These offer symbolic support to Britain’s global trade agenda, but little near-term economic boost. The India deal focuses on modest tariff reductions, with government estimates suggesting a negligible GDP impact of just 0.1% by 2040. The US deal will cut tariffs on British steel and some car exports but leaves the broader 10% baseline tariff on UK goods intact. Net benefit to UK exports? Limited. Still, with market nerves frayed by trade uncertainty, even small wins may help cushion sentiment.
And for the homeowners, UK housing market data from the Royal Institution of Chartered Surveyors painted a picture of cautious stability, with activity neither improving nor worsening meaningfully. The consensus expectation is that the housing market will broadly flatline in real terms, with wage growth gradually restoring affordability without the painful adjustment of a nominal crash. Thankfully, UK mortgage rates finally appear to be coming down, and we probably have Trump to thank for that!
Europe
Here the economic picture added another twist this week, with German industrial production (excluding construction) surging 3% month-on-month in March, its strongest gain since August last year. Encouragingly, the pick-up was broad-based across capital and consumer goods, with pharma and automotive standing out. This marked the first quarterly expansion of German industry in two years. Yet beneath the surface, much of the strength likely reflects front-loading of exports to the US ahead of the looming tariff deadline. Pharma shipments, auto production, and exports to the US all spiked in March, raising the risk of a Q2 pullback. While surveys like the manufacturing PMI and IFO Index suggest tentative improvement, structural headwinds and trade uncertainty remain firmly in place. Oxford Economics expects the eurozone industrial sector to stay in recession this year, with a gradual recovery likely only in 2026, as policy uncertainty eases and lower rates begin to filter through.
China stimulus probably less than hoped for
With a 145% tariff effectively acting as an embargo, the US-China trade channel has seized up. Import volumes surged ahead of the tariff deadline but have since plunged to levels typically seen only around Lunar New Year shutdowns. Domestically, Beijing has rolled out a broad package of stimulus measures, including cutting the banks’ reserve requirement ratio, reducing key policy rates, lowering housing loan rates, and offering targeted lending for agriculture, small businesses, and technological innovation. The government has earmarked over CNY 1 trillion to boost liquidity, alongside measures to support the auto sector, encourage stock buybacks and dividends, and channel funding into pension, education, and cultural services.
Notably, the Chinese authorities have pledged to strengthen equity market stability, with sovereign wealth funds and insurance companies encouraged to increase stock market exposure. Yet despite this flurry of initiatives, Chinese equities have remained largely unmoved, suggesting markets are either sceptical about near-term impact or are positioning for a potentially larger stimulus wave. The upcoming US-China trade discussions in Switzerland could offer incremental (if not optical) progress, but investors are waiting to see if Beijing’s domestic push can shore up confidence.
Exceptional or not?
As in my opening statement, the divergence between US and non-US equities is becoming stark and persistent. US stocks have held up remarkably well relative to bonds, yet global equities continue to outperform their American counterparts. One reason is that US tariffs are a deflationary shock for much of the world without a homegrown inflation problem. That gives foreign central banks room to ease, supporting local risk assets, while US policymakers remain stuck in a holding pattern.
Where next?
With roughly 60 days left before the tariff pause expires, the clock is ticking, and the path forward remains anything but clear. At the time of writing, the US-China trade talks in Switzerland have yet to produce any substantive outcome. While Treasury Secretary Scott Bessent met with Vice Premier He Lifeng, there has been no joint statement, no clear roadmap, and certainly no sign that the 145% tariff on Chinese goods is about to be lifted. That might all change on Monday, I am sure we will get some positive mutterings from The White House, but I suspect it’s going to take longer than the markets want for anything substantive.
That hasn’t stopped Donald Trump from trying to shift the narrative. On Friday, he told investors to ‘buy stocks’, an oddly timed endorsement given the backdrop of policy uncertainty and a fragile earnings environment. While Trump has a track record of jawboning markets higher, this felt more like bravado than a reliable buy signal.
The broader landscape remains muddled. Oil markets, central banks, corporations, and consumers are all in a slow-moving standoff. Everyone is hoping someone else will blink first. The prevailing market view still leans toward a soft landing – that growth will endure, inflation will stay contained, and Powell will eventually oblige with a series of rate cuts. However, that thesis rests on several assumptions that could easily unravel.
Beneath the calm lies a messy mix of geopolitical risk, strained global supply chains, and sector-specific stresses. Investors are leaning heavily on the idea that policy will eventually rescue sentiment, but hope is doing a lot of heavy lifting. And while the week’s biggest market mover may have been an upbeat AI chip headline, the underlying narrative hasn’t changed much. July’s tariff deadline looms large. So far, uncertainty is the only thing that’s been reliably priced in and investors, including myself, are still watching, waiting, and wondering which shoe drops next. The bounce over the last few weeks has been gratefully received, but this is a time to remain cautious, stay invested, but have the stomach for a bit more market volatility yet!
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