Citigroup Inc. is sounding the alarm bells for the world economy.
In an analysis published late on Tuesday, the New York– based bank's chief economist, Willem Buiter, said there is a 55 per cent chance of some form of global recession in the next couple of years, most likely one of moderate depth and length.
Unlike the U.S.-driven international slumps of the past two decades, this one will be generated by sliding demand from emerging markets, especially China, which has surged in size to become the world's No. 2 economy.
"The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China," wrote Buiter, a former U.K. policy maker.
Among reasons for worry is his view that in reality China is already growing closer to 4 per cent than the government's goal of about 7 per cent targeted for this year. A shallow recession would likely occur if expansion slowed to 2.5 per cent in the middle of next year and stayed there, he said.
Other emerging markets such as Brazil, South Africa and Russia are already in trouble while developed economies are still lackluster. Commodity prices, trade and inflation remain sluggish and corporate earnings are slowing.
Frequent Outlier Buiter is a frequent outlier. Counterparts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. are playing down the risk posed by China to rich economies, while those at Societe Generale SA said this week that they envisage just a 10 per cent chance of a new global recession with cheap oil providing a buffer against the emerging market weakness. In July 2012, Citigroup was warning of a 90 per cent chance Greece would leave the euro only to be proved wrong.
In the case of China, Buiter reckons its facing a "high and rapidly rising risk of a cyclical hard landing" given excess capacity and debts in key sectors as well as corrections in the markets for stocks and real estate.
He worries the policy response to fading demand will fall short with debts limiting the scope for monetary policy to help even as the central bank cuts interest rates and tells banks they can hold less cash. Authorities are reluctant to let the yuan fall too far after August's devaluation or to race to the rescue with fiscal policy.
Indeed, China's central bank governor Zhou Xiaochuan said last weekend he sees no reason for the yuan to decline further in the long run.
Low on Ammunition As for the advanced economies, Buiter said China's woes could infect them via declines in trade given it accounted for 14.3 per cent of global commerce in 2013. China unloading some of its $6-trillion of foreign assets such as U.S. Treasuries could also roil international financial markets, while the dollar could surge as investors seek a safe haven.
A 2016 recession could be avoided if monetary and fiscal policies are eased, yet Buiter sees most rich nations running low on ammunition either because interest rates are at rock bottom or because politicians won't want to use the tools they have. If the Federal Reserve and Bank of England raise rates soon they could be cutting them again by the end of next year, he said.
"Today, the interest rate is out of commission as a policy instrument in most developed markets and fiscal space is more severely constrained than in 2008 almost everywhere," according to Buiter.
While he said there is unlikely to be a repeat of the 2008 financial crisis of a Depression-like decline in global gross domestic product, he warned the outlook would worsen if investors suddenly panic about mounting public debts or if politicians lapse into protectionism or currency devaluations.
"Economists seldom call recessions, downturn, recoveries or periods of boom, unless they are staring them in the face," said Buiter. "We believe this may be one of those times."