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55% Chance Of Made-In-China World Recession, And Rich Countries Are Out Of Ammo: Citigroup

The U.S.’s fourth-largest bank is betting the world is headed for a recession.

In a note published Tuesday, the chief economist at Citigroup, Willem Buiter, said the global economy faces a 55 per cent chance of falling into recession, thanks to the downturn in China.

What’s worse, Buiter believes that developed countries can do little to stop it, because they’ve already used up their ammunition fighting the last economic slowdown.

"We believe that there is a high and rising likelihood of a Chinese, [emerging market] and global recession scenario playing out," Buiter wrote.

China has experienced a stock market rout in the past several months that has spooked global markets, causing global stock and commodity prices to swing wildly.

The Chinese government this week downgraded its projections for the economy, to 7.3 per cent growth this year, from 7.4 per cent. But Buiter believes it may be growing as slowly as 4 per cent, which would be the lowest rate the country has seen in decades. The world risks a recession if Chinese growth falls to 2.5 per cent, he estimates.

"We consider China to be at a high and rapidly rising risk of a cyclical hard landing," he wrote.

A global recession led by China would signal a shift in the nature of the world’s economy. Most recent downturns that went global originated in the U.S., but China has grown to be the world’s second-largest economy and other economies have grown more reliant on the country.

Though Canada’s trade relationship with the country is limited, China is the world’s largest importer of natural resources and demand there influences commodity prices that Canadian exporters get. China’s slowdown is one of the reasons (along with growing supply) generally cited for the decline in oil prices.

Canada entered what economists are calling a "technical recession" in the first half of this year, with GDP shrinking for two consecutive quarters. But other indicators, such as the housing market and job growth, have continued to grow, which is why some observers don't recognize this as a "real" recession. But a Chinese slowdown that spreads to other parts of the world could exacerbate the problems in Canada's economy, and possibly extend the local recession.

Data released this week shows Chinese imports have fallen by 13.8 per cent over the past year, while imports have declined by 5.5 per cent.

Buiter is concerned that, unlike in previous recessions, the developed world will have little ammunition with which to fight the downturn. Central banks, including in Canada, have kept interest rates at or near record lows for years, leaving little room to lower them further, and many of them (the U.S. Federal Reserve, the European Central Bank, the Bank of Japan) ran or are running quantitative easing programs that have injected trillions of dollars into the global economy.

The Bank of Canada on Wednesday kept Canada’s key lending rate steady at 0.5 per cent, having dropped it twice this year already, from the 1 per cent level it had been at for years.

“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,” Buiter wrote.

But Bloomberg notes that Citigroup is often an “outlier” and has been known to be wrong before, such as in 2012 when the bank estimated a 90 per cent chance Greece would leave the eurozone.

It reports that a recent assessment from Societe Generale forecast only a 10 per cent chance of a global recession.

Lower oil prices are putting more money into consumers’ pockets, which should help the world weather the Chinese downturn, Societe Generale said.

(H/t: CNBC, Bloomberg)

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