The severity of the collapse in markets late last year was quite surprising, given that global gross domestic product continued to grow very close to trend in the fourth quarter. Many global markets, including the major risk assets, the yield curve and credit spreads, are now pricing a probability of recession of at least 50 per cent within 12 months. 

This recession risk seems far too high, especially in the US. The strength of the American labour market, and the recent indications from the Federal Reserve that it will pause its rate increases, should protect the economy from a severe setback this year. As goes America, so goes the developed world.

With investors too pessimistic about immediate economic prospects, risk assets may continue to recover from present depressed levels. An alternative, however, is that asset price turbulence will return, setting in train a tightening in financial conditions that independently causes a recession.