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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