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IIF economist does not project recession for US, other advanced economies

An imminent recession for the U.S. and other major economies is unlikely at this point despite ongoing concerns about U.S.-China trade tensions, according to the deputy chief economist of the Institute of International Finance, or IIF.

"People are quite pessimistic in general," Sergi Lanau told reporters at the IIF's annual membership meeting Oct. 17 in Washington, D.C. "We think that people are missing out on some positive signals and perhaps overlooking the fact that the services economy, which is much larger than manufacturing in all countries, is still holding up quite well."

One of the major questions market participants still have is whether a truce between the U.S. and China is enough to positively affect the economy. The two nations reached a partial trade deal earlier this month, delaying an increase in tariffs to 30% from the current 25% rate on $250 billion of Chinese imports that was set to begin Oct. 15.

The International Monetary Fund, which is also holding its annual meeting in Washington, has called for a rollback of tariffs, along with opening trade in services and e-commerce, as part of its suggestions to reform the global trade system.

While investors appreciate the current U.S.-China truce, a lack of certainty could still be dampening investment, according to Robin Brooks, the IIF's chief economist.

"The environment that they're in, no one takes a truce for granted," Brooks said. "Everyone thinks, it could just be interrupted again in one month, so the positive animal spirits that could be unleashed and could show up in higher investment, maybe they don't."

Labor and services

The strength of the labor market has been a major bright spot for the U.S. economy, even as manufacturing indicators have slipped further into contraction territory, evidenced by the ISM manufacturing purchasing managers' index hitting a 10-year low at the start of the month.

The IMF highlighted the strength of the services sector as a boon to the global economy, though there are questions as to whether the sector may be subject to spillover effects.

Lanau said these spillover risks remain limited, highlighting Germany as an example even as its business activity fell for the first time since 2013 earlier this month.

"Even in Germany, [which is] like the 'Exhibit A' for manufacturing weakness ... Even there, services are still doing kind of OK," he said.