World stock market losses nearing $8 trillion

World stock market losses are approaching $8 trillion so far this year and investors last week poured the most money into government bond funds in a year, suggesting they fear the global economy could tip into recession, Bank of America Merrill Lynch said on Friday.

The bank’s US economists also said on Friday that the likelihood of the world’s largest economy entering a recession in the coming year has risen to 20 per cent from 15 per cent.

While a repeat of the 2008-09 great recession “is a big stretch” and even the one-in-five chance of a normal recession remains low, they cut their 2016 growth forecast to 2.1 per cent from 2.5 per cent.

Reflecting the increasingly bearish sentiment engulfing world markets, some $7.8 trillion was wiped off the value of global stocks in the three weeks to January 21, BAML said.

“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.

Stocks around the world have had one of their worst Januarys on record, with slumping oil prices, deepening concern over China, and the Federal Reserve’s first interest rate hike in a decade all spooking investors.

A recession is typically defined as two consecutive quarters of economic contraction.

The US economy ground to a virtual standstill in the fourth quarter of last year, according to many estimates, and the manufacturing sector is already in recession.