The risk of a global recession is rising, although it is hardly a sure thing, says analysts at UBS Ltd. in a new report.

UBS says that its scores for global growth, industrial production, and capital investment “have dropped significantly over the last three months”. Indeed, it suggests that the world’s advanced economies are, “close to, if not already in, recession.”

Emerging markets are in better shape, it notes; and there is “negligible risk” of recession there. “However, forward-looking indicators suggest some emerging economies, most notably those in the EMEA [Europe, Middle East, and Africa] region, have lost momentum over the past few months. Smaller Asian economies with large exposures to world trade have also lost steam,” it reports.

Global growth is not likely to avoid the impact of a US slowdown, or recession, UBS says. “Weaker U.S. consumption will compress import demand and hence world trade. A higher cost of capital, credit restraint, and high energy and food prices will also slow global growth below trend in 2008-2009,” it predicts.

As a result, it now expects global GDP growth of 2.8% in 2009 and 3.3% in 2008. “At 2.8%, global growth will be only 0.3 percentage points above the demarcation point of a global recession,” it says. “Lower equity markets, wider credit spreads, falling government bond yields, and sagging commodity prices suggest investors also anticipate weaker activity ahead.”

UBS says that its “recession probability model suggests investors place about a 25% probability on a global recession in the year to come.”

Along the way, UBS predicts that “the U.S. dollar’s role as mainstay of global monetary arrangements will fade as high-inflation emerging economies gravitate to alternative nominal anchors. But high inflation in the emerging complex will also test investor confidence in ways not seen in more than a decade.”

“The world economy is exiting an unprecedented half-decade of strong growth and robust profitability. Equity and corporate credit returns will be more modest and (eventually) will be driven more by falling risk premiums than by earnings growth,” it concludes. “Distressed debt and undervalued assets are likely to become a key locus of returns.”