And so the MB outlook spreads, from Citi’s Willem Buiter:
A global recession starting in 2016, led by China is now our Global Economics team’s main scenario. Uncertainty remains, but the likelihood of a timely and effective policy response seems to be diminishing.
- China continues to dominate much of the current debate; specifically the extent to which the now well publicized economic slowdown could have wider contagion effects. Citi’s Global economics team, led by Willem Buiter, believes that China could be the driving force behind a global recession during the next two years.
Last week we presented four scenarios based on different outcomes for Chinese and US economic growth. One of those scenarios; a global recession in which China’s slowdown drags other emerging markets and eventually the advanced economies down with it, has been examined in detail by our Global Economics team.
- Any global recession is likely to originate in emerging markets with China in particular at risk of a hard landing.
- If the global economy slides into a recession of moderate depth and duration during 2016, it will most likely be dragged down by slow growth in a number of key emerging markets, and especially in China. We see such a scenario as increasingly likely. Indeed, we consider China to be at high and rapidly rising risk of a cyclical hard landing.
- There has been a long history in China of the official GDP data understating true GDP during a boom and overstating it during a slowdown. Citi’s own best prediction of ‘true’ real GDP growth for 2015 is 4% or less. Other activity indices overwhelmingly suggest an economy in which the growth of industrial production and capital expenditure is slowing rapidly.
- Recession in China and other EMs would likely slow DM growth too Should China enter a recession, with Russia and Brazil already in recession, we believe that many other EMs will follow, driven in part by the effects of China’s downturn on the demand for their exports and, for the commodity exporters, on commodity prices.
- We also consider it likely that, should the EMs enter recession territory, the advanced economies or developed markets (DMs) will not have enough resilience, either spontaneous or policy-driven, to prevent a global slowdown and recession. The large DMs may not experience recessions themselves but will likely grow more slowly; possibly more slowly than potential, and almost certainly more slowly than expected.
- The key for markets will be the policy response in China and, of course, the way in which DM central banks react to greater volatility, rising risk premia in asset prices and the implied tightening in financial conditions. Recent rhetoric still suggests that raising rates is still right in the middle of the Fed’s radar screen, but markets are suggesting that this may not be possible, with a September hike certainly being priced lower and lower.
- If the markets are right and there is an offsetting policy response to weaker equity and commodity markets, it will bring to mind parallels with 1998. This would suggest that it might be premature to turn too bearish on DM equities. If, however, EM growth concerns do spill-over to DM, we can envisage a time when we may want to reverse our preference for DM over EM, but that time is not here yet.
