Economist fears a 30 percent stock market correction with consumer spending ‘maxed out’

  • Steen Jakobsen, from Saxo Bank, cited several factors including growing credit loans, a widening fiscal deficit in the U.S., doubts over infrastructure spending plans and a potential trade war.
  • "I think overall we have been pricing in for Goldilocks and we are closer to Frankenstein to be honest," he said.
  • He added that in a scenario of a potential sudden economic recession, he sees a possible market correction of between 25 and 30 percent.

Stock markets could see a hefty fall in the coming months due to a slew of trends that point to a downturn in the global economy, one economist told CNBC.

Steen Jakobsen, the often-bearish chief economist at Danish investment house Saxo Bank, cited several factors including growing credit loans, a widening fiscal deficit in the U.S., doubts over infrastructure spending plans and a potential trade war.

"All the data we've seen over the last few weeks has basically been that the consumer is maxed out, we've seen that in credit card loans as well, so I think the consumer is done spending the money," he told CNBC Tuesday.

New data Tuesday showed that U.S. consumer confidence declined in March, falling below expectations and breaking a two month streak of gains.

"I think overall we have been pricing in for Goldilocks and we are closer to Frankenstein to be honest," he said. He added that in a scenario of a potential sudden economic recession, he sees a possible market correction of between 25 and 30 percent.

Jakobsen highlighted a "Goldilocks" scenario that he feels traders are mistakenly pricing in to markets, where fresh economic data are either not too hot or not too cold. Overall, the global economy is currently experiencing lower levels of unemployment and higher growth. Looking at 2018 in particular, many analysts hoped for strong global growth on the back of higher inflation and higher investment, but according to Jakobsen, these drivers "aren't actually materializing." Instead, Jakobsen made a reference to the novel "Frankenstein," arguing that the economy had been skewed by central bankers, who have injected trillions of dollars into the global economy to boost growth and investment.

Traders work on the floor of the New York Stock Exchange (NYSE) on March 23, 2018 in New York City.
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Traders work on the floor of the New York Stock Exchange (NYSE) on March 23, 2018 in New York City.

Trade tensions

The first quarter of 2018 "started at more than 5 percent expected GDP (gross domestic product); we are now significantly less than 2 percent for the (first quarter) expected, so I don't really see things happening in the growth area," Jacobsen added.

"We've been at 2 percent exactly since the financial crisis, I don't think we're going to deviate from that," he said.

The Organization for Economic Cooperation and Development (OECD) estimated earlier this month a 3.9 percent growth rate for the 20 most developed economies in 2018 and 2019. However, the group warned that the trade tensions in early March could threaten their best economic outlook in seven years. Fears over a potential global trade war have become a "catalyst" for lower economic prospects, Jakobsen said, but there are other factors clouding economic growth.

"We have slow growth, no inflation input coming through, the infrastructure spending is not in the spending bill in the U.S. anymore, so a lot of the factors strategists go on this program to talk about again and again aren't actually materializing," he argued.

In the U.S., plans to reform the tax system and increase infrastructure spending led investors to expect higher market returns and higher global growth. Though the White House has approved changes to the tax system, some analysts are worried over its impact on the country's fiscal position. And the infrastructure bill is stuck in U.S. Congress, raising doubts whether the trillion-dollar plan will ever see the light of day.

More room to run?

On Tuesday, global markets traded higher as fears over a global trade war eased. Some analysts have a different view to Jakobsen's, believing that there is further room for market gains throughout 2018.

Karen Ward, chief market strategist at J.P. Morgan Asset Management said in an email that firms are more positive about the future and have been investing in plants and machinery.

"Last year was not only the strongest pace of business investment growth in the G-7; it was also the first year expansion was synchronized across all seven countries," she said, adding that this is set to boost productivity.

"It might well be productivity that surprises markets, giving the economic recovery and the equity rally room to run," she said.