AMP Capital's Investment Insight for November 2009 in the RaboPlus Investor Centre

Key points

• There is much talk about a 'double dip' back into recession in the US, which would drag the global economy, shares and other assets back down.

• While it is natural to worry about this and important to be conscious of the risks, it is worth noting that talk of a double dip (or an aftershock) is often common after recessions. Usually it doesn't happen and we think a double dip back into recession is unlikely.

For some time now, we've maintained the view that the current cyclical bull market in shares has further to run. The economic and profit recovery has further to go, inflation and interest rates remain low, and there is still plenty of cash sitting on the sidelines. These are all positive factors for shares and other growth assets. Of course, this outlook is not without risk. Recently, there has been much talk about a 'double dip' recession for the US next year. Undoubtedly, a US double dip would be bad news for the global economy given the renewed weakness it would trigger in trade flows and confidence. So, this note looks at the risks, puts them in context and, ultimately, shows why we think a double dip recession is unlikely.

Double dip recessions and fears in history

The fi rst thing to note is that talk of a double dip is common towards the end of most recessions. For example, such talk arose after the early 1990s recession and was similarly rife in 2003 as the world emerged from the tech wreck. Usually it doesn't happen, but of course there are notable exceptions to this.

• The early 1980s traced out a W-shaped pattern in the US, with recession in 1980 followed by a brief recovery in 1981, only to return to recession into 1982.
• The 1990s saw back-to-back recessions in Japan.
• The US went back into recession in the late 1930s after recovering from depression in 1934, 1935 and 1936.

All of these situations had one thing in common; premature tightening. In 1981, the US Federal Reserve (Fed), led by Paul Volker, raised interest rates aggressively to squeeze out inflation; in the 1990s, Japan tightened fiscal and monetary policy before recovery became sustainable; and in the mid 1930s, US authorities moved to raise tax rates and tighten monetary policy (via tighter bank reserve requirements) before a sustainable recovery took hold.

Normally, however, fears of a double dip prove unfounded.

Potential drivers of a double dip recession in the US next year

A range of factors are cited this time around as potential drivers of a double dip in the key US economy next year.

These drivers include:

1. Monetary and fiscal policy will be tightened too early.
2. A US dollar crisis.
3. Rising unemployment will cut into consumer spending.
4. The banking system is too weak to lend and will be hit by more shocks.
5. There will be another oil price driven energy crisis.
6. We are seeing the mother of all carry trades that will soon come crashing down.

 Read the full report here.