World stock market losses are closing in on $8 trillion and investors are pouring their money into government bond funds, suggesting they fear the global economy could tip into recession, Bank of America Merrill Lynch said on Friday.
Analysts at Bank of America say a potential recession in the coming year has risen by 20% from 15%. They still call a repeat of the 2008-2009 great recession “a big stretch” and say there is only a one-in-five chance of a normal recession.
Analysts have cut their 2016 growth forecast to 2.1% from 2.5%.
About $7.8 trillion was wiped off the value of global stocks in the first three weeks of 2016.
“We cannot rule out a recession in the next year. Accidents will happen, and we are concerned about the lack of policy ammunition to deal with a major shock,” economists Ethan Harris and Emanuella Enenajor said in a note on Friday.
“However, when markets are in such a fragile state there is a temptation to lose sight of the economic fundamentals. To us, the economy is okay and recession risks are low,” they said.
World stocks have had their worst performance on record as oil prices continue to sink, the Chinese economy falls into shambles, and the strong US dollar pushes down returns for US retailers and manufacturers.
To enter into a recession the economy must remain in two consecutive quarters of economic contraction. The US manufacturing sector is already considered to be in a recession.
Economists at Citi, Morgan Stanley, and others have already said the risk of a global recession is rising. They also place the probability of a recession at 20%.
Government bond funds attracted a “huge” $5.1 billion in the week to January 20, the biggest inflow in 12 months. The 10-year U.S. Treasury yield fell below 2% this week for the first time in three months,
In a telling sign of the times, investors withdrew a net $3.5 billion from equity funds in the week to January 20, BAML said, the third consecutive outflow.