Will China lead the world to another recession? Citigroup responds
If the global economy slips into a moderately deep recession next year, it will most likely be dragged down by shrinking growth in major emerging markets - especially a recession in China, says Willem Buiter, chief economist at Citigroup.
Buiter, who is also a former member of the Bank of England's interest
rate-setting committee, said in a note that the bank believes there is a high and rising likelihood of a Chinese, emerging market and global recession scenario playing out.
Worries over a steep slowdown in China's economy - the second largest in the world after the U.S. - has rolled over global markets in recent months.
Deepening those concerns, data issued on Tuesday signaled the country's dollar-denominated exports dropped by 5.5 percent in August from a year earlier, while imports plunged almost 14 percent.
Although, a global recession is
not yet reflected in Citi's benchmark forecasts for global or Chinese
growth in 2016, Citi's global
economics team has supported this view.
In his opinion, what is more likely is global real gross domestic product growth (GDP) dipping consistently over the next few years, dropping to or below 2 percent around the middle of 2016.
He also noted, however, that the possibility of some kind of recession, moderate or severe, was 55 percent.
If the world economy slips
into a recession, generally identified by two straight quarters where
GDP falls, it will be the emerging markets. Particularly, China will lead the road, Buiter said.
"We consider China to be at a high and rapidly rising risk of a cyclical hard landing," the Citi note said.
"The reasons behind China's downturn and likely recession are familiar from the long history of business cycles everywhere: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets."
One of the asset markets Citi referred to was the equity market. Having soared some 60 percent between the start of the year and June, China's benchmark Shanghai Composite gauge then dropped sharp and fast.
Earlier this week, China revised down its forecast for economic growth this year to 7.3 percent from 7.4 percent.
Buiter said that if China enters a recession, many emerging markets will probably follow.
"The advanced economies or developed markets (DMs) will not have enough resilience, either spontaneous or policy-driven, to prevent a global slowdown and recession, even though many large DMs will not experience recessions themselves but will merely grow more slowly," he added.
