Global Economy on Verge of Recession: Analyst
Global financial markets are caught in a slippery death spiral. They will cause a global recession that will spare nobody, say Citigroup analysts. (Source: “Citi: World economy trapped in ‘death spiral’,” CNBC, February 5, 2016.)
Citigroup’s Jonathan Stubbs says four trends are fueling pessimism in the global economy and the markets. These are the rising value of the U.S. dollar, low commodity prices, the weakening of trade and capital flows, and slower growth in emerging markets.
“It seems reasonable to assume that another year of extreme moves in the U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop and make it very difficult for policymakers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks,” said the analysts. They add that governments of emerging market countries will find the situation especially tough.
Profits of corporations and markets are also at risk. They continue to decline in a stage Citigroup nicknames “Oilmageddon.” The logic is that the combination of a stronger U.S. dollar, weaker oil/commodity prices, and weaker world trade/petrodollar liquidity leads to weaker emerging markets and global growth. And the process repeats itself ad infinitum. This leads to Oilmageddon, a “significant and synchronized” global recession and a proper modern-day equity bear market.
The death spiral is already being felt throughout financial markets, the analysts said.
But it’s not all fire and brimstone. Citigroup does offer some redemption.
The analysts forecast a slight improvement, which begins with an increase in the price of oil. By the end of 2016, it could reach $50.00 a barrel. Higher oil prices could stabilize currency values and raw material prices. In theory, says Citigroup, this should lead to a recovery of financial assets.
Stubbs said, “The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail.”
Crude oil prices have dropped some 70% since just over a year ago. The U.S. dollar, meanwhile, has gained some 20% against a host of currencies. It has made significant gains against the euro and the British pound. Citigroup has expressed less optimism than the IMF in 2016 and 2017 economic growth. Whereas, the IMF predicts growth of 3.4% in 2016 and 3.6% in 2017, Citigroup predicts 2.7% in 2016. It cut its outlook last January.