China leading world towards global economic recession, warns Citi
A brutal slowdown across emerging markets will hurl the global economy into a fresh recession
China's economy is in a far worse state that official figures suggest Photo: Getty Images
By Peter Spence, Economics Correspondent
4:31PM BST 09 Sep 2015
A “hard landing” for the Chinese economy will likely lead the world into a recession in the next year, Citi’s global economics team has warned.
Analysts at the Wall Street bank believe that a slowdown concentrated in emerging markets will drag down demand and see economic activity fall well below its potential across the world.
They anticipate the global economy to slide into recessionary territory during next year, and remain there for most of 2017. The chance of such a global recession now stands at 55pc, staff estimated.
Citi assigned a 15pc probability to the risk of a “severe recession”, in which the global economy enters a boom, overheats, and subsequently falters in dramatic fashion.
Willem Buiter, global chief economist at Citi and a former Bank of England rate setter, said “that there is a high and rising likelihood of a Chinese, emerging market and global recession playing out”.
Economists seldom call recessions, downturn, recoveries or periods of boom, unless they are staring them in the face. We believe this may be one of these times.
The warning signs that foreshadow a recession in the world's second largest economy are already evident. Recent episodes of “irrational exuberance” in China’s property and stock markets are “the classical recipe for a recession in capitalist market economies”, he said.
Mr Buiter identified excess capacity across much of China’s economy and a highly-leveraged private sector as troubling indicators of the squeeze to come.
Citi estimated that China is now growing at just 4pc, well below the numbers issued by its government statisticians, and the country’s official 7pc growth target. Other large economies - Brazil, Russia, and South Africa - are already in trouble.
Should growth in China slow further still, Mr Buiter said that “many other emerging markets, already weakened, will follow, driven in part by the effects of China’s downturn for their exports and, for the commodity exporters, on commodity prices”.
Mr Buiter said that China’s policy response had been “underwhelming”. It is “not a command economy … [but] like most real-world economies today, its is a messy market economy of the crony-capitalist variety”, he claimed.
Citi predicted that Beijing’s leaders will be unwilling to take more radical steps to shore up growth, stopping short of a more dramatic devaluation of the yuan. Li Keqiang, the country's premier, said that China would not start a currency war.
Signs of global weakness have also been reflected in corporate earnings, growth and inflation rates, and trade figures - all suggestive of insufficient levels of demand. “Economists seldom call recessions, downturn, recoveries or periods of boom, unless they are staring them in the face,” Mr Buiter said. “We believe this may be one of those times.”
While the recession envisaged by Citi’s economists is one of only moderate depth and length, it would come at a difficult time for the world’s policymakers. Across many countries monetary policy is considered to be tapped out, with central bank interest rates close to - or even below - zero.
Markets currently expect the Federal Reserve and Bank of England to have managed to raise their interest rates by the middle of next year, but only by the smallest of margins. It is at this point which Citi’s economists believe a recession will bite, and they may be forced to reverse those incremental rate hikes.
And while central banks could use other tools to avoid the recession of which the US bank warns, Mr Buiter warned that policymakers will not be allowed to act, restricted by politicians critical of unconventional monetary interventions.
