Friday, 11 May 2012

Leading indicator...

iPredict runs markets on GDP growth rates stretching out through December 2013. Across all quarters, I'd gone long on the "GDP to grow by MORE than -0.5% in the xxx quarter"; things aren't great, but the rebuild has to push current measured activity up.* We can take the inverse of each of those contracts as being the likelihood of serious recession in that quarter.

Here are the probabilities of GDP growth less than -0.5% in each quarter:

So chances of serious recession are higher than one-in-four from December 2012 onwards.

Here are inflation probabilities in each quarter. The first number is the chance of inflation less than 1%; the second, inflation more than 3%. 
A few things worth noting:
  • Why is June next year so much less risky than the surrounding quarters?
  • If we look at the unemployment forecasts, we move from an 86% chance of unemployment higher than 6% in June 2012 to a 40% chance of that by March 2013. I've heard of jobless recoveries, but low(ish) unemployment recessions?
  • The balanced but risky low and high inflation profile for the quarters further out says to me that traders expect the Reserve Bank to have a tough job ahead but not to be more likely to err one way or the other.
  • I think those recession odds are a bit on the high side. But I'm sufficiently exposed on those markets that I'm not keen to take on more contracts.

* I'm not saying that earthquakes are good for the economy. I am saying the reconstruction after massive wealth destruction has to show up in the stats.

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