A global recession could be just around the corner according to economists at Citi.
Citi defines a global recession as GDP growth less than 2% globally — not the traditional definition of a recession, which requires contraction in economic output for two straight quarters.
China — the world’s second-largest economy — is expected to grow more than 6% this year. The US is also expected to experience growth.
Citi’s economics team led by Ebrahim Rahbari, Willem Buiter, and Cesar Rojas, had this to say about the global economy in a note to investors on Thursday.
“We believe that we are currently in a highly precarious environment for global growth and asset markets after 2-3 years of relative calm. 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 US) 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 EM.
The growing threat to the global outlook rests on poor fundamentals, which include the pre-existing fragilities related to the structural and cyclical slowdowns in China and its unsustainable currency regime, broken [emerging market] growth models, excessive leverage across many countries and sectors, and rising regional risks (Brexit) and geopolitical risks (including in Russia, Turkey and Syria, the South China Sea, and North Korea).
These fundamental concerns are aggravated by a crisis of confidence that is in part fueled by a growing worry that, should conditions deteriorate, they may not elicit an effective policy response. The main ‘game changers’ in our view are the emerging belief that even the US economy is no longer bullet-proof and that policymakers (in the US and elsewhere) may not be there to come to the rescue of their own economies, let alone the world economy, by propping up asset prices and aggregate demand. It is likely, in our view, that global growth will this year once again underperform (against long-term trends and previous year forecasts). Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese mismeasurement). But in our view, the risk of a global growth recession (growth below 2%) is high and rising.
So that’s basically the whole laundry list of reasons to be worried about the global economy.
And what stands out to us is Citi’s contention that even a minor issue in the US economy could sink the whole thing.”
The group adds:
“A material slowdown in the US, even short of a recession, would still be a major headwind for the world economy: at this point, it could make a global recession according to our definition almost unavoidable. The damage to global growth conditions would come from three sources: deteriorating financial conditions globally, weaker demand from the US and weakening (consumer and business) sentiment more broadly (through contagion).”
Growth in the services sector of the economy has grown in the US in early 2016, a sector that accounts for 85% of the GDP in the US.
US officials on Tuesday also reported positive housing data and a solid market reading.