Analysts at Citigroup say financial markets are trapped in a dangerous “death spiral” that has been caused by sinking oil prices.
The bank’s research team described a “negative feedback loop” in the global economy and across financial markets.
The group says that negative loop is fueled by a strong dollar, lower commodity prices, weak trade and declining growth in emerging markets.
Those four factors are making it hard for central banks to fight deflation and stop another global downturn.
If the loop continues, Citi warns, the world could slip into “significant and synchronized” global recession.
The report then invented the doomsday term “oilmageddon.”
“It seems reasonable to assume that another year of extreme moves in USD (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop,” analysts Jonathan Stubbs, Ayush Tambi and Nikhil Jadhav wrote.
“Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon,” they add.
With oil down 70% in the last 18 months, now selling at just over $31 per barrel, there is definitely room for concern.
At first the lower prices helped major importers such as China and India. However, as prices continued to plummet, they also slowed trade and capital flows, which hurts everyone.
The entire report isn’t doom and gloom. Here’s one shining possibility for 2016.
“Oil prices are likely bottoming. Greater stability lies ahead for FX and commodity markets. The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail.”