The bank which warned about a made-in-China "global recession" as one of 2016's key risks is singing a modestly more optimistic tune on the state of the world economy.
Citigroup Inc. economists led by Ebrahim Rahbari note that the stimulus measures deployed by Chinese policy makers are beginning to bear fruit, and the external backdrop has shown signs of improvement. While global growth remains weak, recent data suggest that "at least for now, it may no longer be weakening," lowering the risk that global GDP growth will fall below 2 percent (at market exchange rates) in 2016, the economists write.
However we're not yet out of the woods. According to Citi's team, there are still a bevy of factors that could derail the global economy's fragile expansion.
Rahbari & Co. highlighted five reasons why they take "only modest comfort" from the recent recovery in commodity prices, the pick-up in Chinese activity, and stable growth in other emerging market economies.
China's backsliding on its pledge to rebalance growth
China's recent return to a credit- and investment-led growth model "appears likely to exacerbate existing credit and investment excesses, and increase risks of an eventual credit and financial bust or a long-lasting period of low growth," writes Citi's team.
Indeed, in years past it's taken more and more borrowing for China's economy to expand at a similar pace, ratcheting up fears that credit is being poorly allocated. The stabilization in activity for the world's second-largest economy has occurred in an environment in which financial conditions have eased materially and the credit spigots remain open.
While estimates of Chinese monthly activity have tended to move in tandem with monetary conditions, Citi says it's worth questioning the durability of this growth model.
Emerging markets haven't been fixed just yet
EM asset prices have been flattered by two things—"both of which may prove temporary," write Rahbari and Co. While the U.S. dollar is weaker and expectations of an aggressive Fed tightening cycle have receded, "structural issues persist throughout many EM countries," they say.
The yield on December 2017 eurodollar futures contracts collapsed at the start of this year as the market carnage caused traders to bet that the Federal Reserve would inch interest rates higher at a more gradual pace than previously assumed.
But if those yields retrace higher at the same pace at which they retreated, emerging market economies might not be on as firm a footing as some hope, and the risks to financial stability stemming from a lofty greenback could once again come on the agenda.
Omnipresent political risk
"A number of political risks threaten, including the risk of Brexit following the UK’s E.U. referendum on 23 June," writes Citi.
The pound has been buffeted by the upcoming Brexit vote, although the currency has staged a swift recovery in recent weeks as the "Remain" camp picked up more support:
The outcome of the referendum, and the U.K.'s economic performance in its aftermath, has the potential to radically change the start date for any tightening phase embarked upon by the Bank of England. And if voters in the U.K. elect to leave the European Union, it would also cause considerable headaches for continental banks.
The world's economic engine is sputtering
"U.S. activity remains surprisingly weak," the economists note.
The U.S.'s growth rate in the first three months of the year was a paltry 0.5 percent quarter-over-quarter, at an annualized rate. While concerns about skewed seasonal adjustments linger, this print underscored the notion that even at a seven-year remove from the financial crisis, the U.S.'s expansion has yet to really kick into high gear.
Economists have steadily been coming around to this way of thinking. Over the past eight months, they've trimmed their expectations for growth in the U.S. economy this year further and further, from a peak of 2.8 percent to 2 percent at present:
That's something you can't blame on residual seasonality alone.
Policymakers lack ammunition—or the willingness to use it
Central banks rates are low, and government debt is high.
"Policy space to respond to a potential downturn remains limited almost everywhere," writes Citi's team.
If a negative economic shock were to hit, the scope for central bank stimulus might be constrained:
With the efficacy of monetary easing waning and some central banks close to the effective lower bounds of their interest rates, any additional accommodation could hinge on cooperation between lawmakers in advanced economies, many of which already have elevated debt-to-GDP ratios.