Equities are at present pricing in a 50-60 per cent risk of recession while bonds are fully adjusting for such an outcome, the bank said in an investment note.

“Unfortunately, it looks like it will take a further drop in equities to force policy-makers to adopt measures dramatic enough to avert a recession and achieve moderate growth in the developed economies,” argues Carl Astorri, global head of economics and asset strategy at Coutts.

Based on data from previous economic cycles, Coutts looked at the average of the lows seen in price-to-earnings ratios before earnings begin to fall. Since 1950, the average PE before earnings fell was 11.3. Using the most recent 12-month earnings, the S&P 500 would have to decline to 1,034 to reduce the PE to this level, or a total decline of 24 per cent from the end-April peak.

“This suggests a 50 per cent probability of recession, with the S&P 500 down 12.2 per cent from its April peak at current levels, and implies a further 14 per cent decline before recession is fully priced-in,” Astorri said.

Using National Bureau for Economic Research data to identify when recessions occur, the average peak to trough decline in the S&P 500 was 29 per cent over the 10 recessions since 1950, Coutts said. Recessions typically ran for around a year. During these downturns, GDP fell by an average of 2.2 per cent. Credit-led recessions typically lasted six months longer, it found.

“Until the worst is priced in, economic data stops disappointing and game-changing policy measures are implemented, we do not see a shift from negative to positive momentum in equities,” said Astorri.