Last week’s forecast of “rapidly rising risk” of a global recession from Citigroup’s chief global economist, William Buiter, is attracting attention, which isn’t surprising at a time of stumbling financial and commodity markets. “The most likely scenario (40% probability), in our view, for the next few years is that global real GDP growth at market exchange rates will decline steadily from here on and reach or fall below 2% around the middle of 2016,” he wrote. “Growth is likely to bottom out in 2017 and start recovering again from late 2017 or early 2018.”
That’s a troubling outlook, although it’s still debatable if the world economy will be as weak as Buiter projects—he admits as much, as per the 40% probability estimate. Forward momentum has slowed overall, but it’s unclear if this is an issue on the margins vs. an acute problem for the global economy in general. Consider, for instance, the modestly upbeat profile of global economic activity through August, based on the latest survey data via the JP Morgan Global All-Industry Output Index. The benchmark held steady at 53.7 last month, signaling a modest rate of growth and still comfortably above the neutral 50.0 mark that separates expansion from contraction. Buiter’s forecast is effectively a warning that this index may slip closer to the neutral 50 mark if not fall below it in the months ahead.
A contraction in the future is certainly a possibility. That’s partly because of the weakness in manufacturing overall, as the JP Morgan figures show, with quite a lot of the softness concentrated in emerging markets—China, in particular.
By contrast, the services sector overall is still humming along at a relatively healthy and stable pace of growth. As such, the question is whether the global trend can turn materially weaker or negative without a substantial deterioration in services activity? Then again, are the generally upbeat numbers on services in most countries about to hit a wall? No sign of that yet.
As usual, the current outlook depends on the source of the prediction. Berenberg’s current global GDP estimate (Sep. 9), for example, suggests that the developed world’s growth will offset the weakness in emerging markets, delivering a slight uptick in global growth next year: 2.6% vs. this year’s estimated 2.4% rise. Take note that this forecast from the German bank is based on current exchange rates rather than purchasing power parity (PPP) estimates, which “give more weight to fast-growing emerging markets and inflate global GDP,” Berenberg advises.
Nonetheless, there’s growing concern that growth will disappoint going forward. Financial markets are effectively forecasting just that. For some countries, the jig is already up—Brazil’s ugly recession is a leading example, although at the moment few analysts expect anything worse than slower growth for China.
That’s a reminder that some of the recent worries over the world’s second-largest economy are confusing contraction with slower growth. China’s “losing momentum,” Berenberg notes, although it still looks like a “gradual slowdown… as China matures and experiments with more market-based policies” and deploys various policy measures to keep a steep decline at bay. As such, “no hard landing despite serious temporary wobbles” is expected at this point.
Granted, China’s transitioning from 7%-plus year-over-year growth to something slower isn’t going to be easy when so much investment has been predicated on a stronger expansion. But for the moment, it’s not yet clear if markets are suffering from a bout of managing expectations down vs. preparing for a global recession.
In any case, the truth will out, one way or the other, perhaps in the data releases over the next several weeks. Meantime, it’s premature to conclude that we’re at the point of no return for global economic output. Macro risk is higher, but assuming the worst is still missing a key ingredient: hard data.