Most major economies, and the US in particular, have weathered the rise in interest rates over the past few years relatively well. However, cracks are emerging. A report in today’s Financial Times finds that corporate bankruptcies are increasing at double-digit rates in most advanced economies, admittedly from low levels. Where do we go from here? As our chart shows, US company failures tend to follow movements in the US federal funds rate, with a lag of at least a year or two. There is likely to be worse to come. In our central scenario, both short- and long-term interest rates decline faster than is currently priced in, and this is sufficient, in the case of the US, to avert a recession led by the corporate sector. In Europe, a recession led by household sector retrenchment is either underway or close at hand.
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