After a few years of reasonably calm markets and stable growth around the world, Citigroup Inc. says the chances of a global recession are already high and only going up.
"In our view, global growth is at a highly precarious point, after 2-3 years of relative calm," the team of economists led by Willem Buiter said in their note, which is likely to exacerbate concerns about the world's ability to withstand a pause in China's stunning economic growth.
"The long-standing fragilities in the world economy relate to the structural and cyclical slowdowns in China and its unsustainable exchange rate regime, the excessive level of debt across many countries and sectors and ongoing regional and geopolitical uncertainty," the economists said. The economists have accordingly revised their forecast for growth this year in advanced economies, from a 2.4 percent in January 2015 to 1.6 percent currently, and warned that the 2016 figure "could well be lower."
When they adjust for what they call "true Chinese growth," the Citi team finds that global growth might have been as low as 2 percent year-over-year in the final quarter of 2015. That is the lowest since the euro zone recession of 2012-13, and if growth remains at such depressed levels, it would qualify as a global recession according to their measures:
"The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies (AE), a large increase in the uncertainty about the AE outlook (notably for the U.S.) and a tightening in financial conditions everywhere. Unlike most of the previous years, the most recent worsening in global growth prospects and global sentiment is therefore driven by the advanced economies rather than [emerging markets] ... Below-potential global growth will likely reinforce disinflationary momentum and global growth could fall to even one percent or lower, in the event of an even sharper AE downturn (including eg a U.S. recession).
While a global recession may be increasingly probable, according to Citi, it's not necessarily unavoidable.
"To avoid a recession and to avoid a greater slowdown in potential output growth than is warranted because of worsening demographics, the world needs a global version of what we would call 'Abenomics plus,'" which in Citi's terms would be easy monetary policy coupled with fiscal stimulus and structural reform that would include "material deleveraging."
But, given their recession call, the team doesn't believe these policy measures will actually occur as fiscal stimulus faces high political hurdles.
"Even though we suspect that ongoing economic weakness and limited options for incremental monetary easing will probably reinforce the trend towards modest fiscal easing, we do not foresee a shift to decisive fiscal easing," they somberly conclude.