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 Citibank Chief Economist Willem Buiter attracted attention this week
with a call for a 55 percent chance of a global recession sometime
in the next two years, most likely starting in the latter half of
2016.
Buiter’s working definition of global recession is important to
note: unemployment above that which keeps inflation in balance, a
gap between output and potential output, or actual real GDP below
potential real GDP.
All of that equates, more or less, to global growth below 2 percent.
Global recessions are not that unusual: there have been four since
the 1970s, with the usual run of traffic being a slowdown in the
developed world spreading to emerging markets. More particularly,
the U.S. tends to be the prime mover.
That’s not what’s likely in the immediate future. Instead Buiter is
forecasting an emerging markets slowdown which hits developed market
activity: via trade flows, via commodity prices, via financial
market effects and via a hit to confidence.
As for China, it is the classic mix: excess capacity meets excess
leverage. We’ve seen it so far in the property and stock market in
China, but the harder to trace impact of local government debt and
industrial production and investment are worrying too.
If we put aside for a moment the likelihood of a global recession,
the interesting question becomes: will policy-makers react quickly
enough and do they have the needed ammunition?
The answers, respectively, are no and no.
Chinese Premier Li Keqiang, speaking Thursday at the World Economic
Forum in Dalian, seemed to rule out quantitative easing,
highlighting its negative unintended effects and calling for
structural reform instead.
Those may be the words of a man trying to inspire confidence in
global markets, and at home, but the message may also bespeak a
reluctance in China to get in front of the slowdown.
Remember that China’s swift and, by and large, effective response to
the great financial crisis was an easier political move to make.
They were in essence cleaning up after mistakes made by others.
Aggressive policy steps in China now, or if the slowdown gets worse,
imply self-criticism, a tougher ask.
PASS THE AMMUNITION
In China and across the emerging markets the policy response options
in a widespread global downturn are not appetizing. As exports
decline, interest rates will be cut, likely as parts of an attempt
to achieve some advantage from currency devaluation.
That, however, is one of those games which gets worse the more
players join in. Debt levels too are either high in many emerging
markets or likely to go higher in a downturn as private or
quasi-state investment debt gets socialized.
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Buiter is particularly downbeat about the potential for aggressive
and effective policy out of China. Given high debt levels it will be
difficult to fund safely and may simply lead to another round of
keeping failing enterprises, state-owned, banks and others, alive
but failing to cut capacity to scale.
In developed markets there is similarly little likelihood of a
strong policy response, especially on the fiscal side.
Imagine, if you will, the quality of the debate in the U.S. about
fiscal stimulus during a global recession in an election year.
“With the possible exception of the UK, the combined monetary-fiscal
stimulus necessary to minimize the depressing effect of an emerging
market recession on economic activity in the developed markets is
unlikely to be forthcoming in most advanced economies,” Buiter
writes.
“This means that the monetary authorities once again will have to do
the heavy lifting.”
So, perhaps the Fed had better raise interest rates next Thursday,
if only to give them something to cut if the downturn comes in what
they expect to be the middle of rate normalization.
A global recession then implies more quantitative easing out of the
major central banks: not just the Fed, but in Japan, Britain and the
euro zone.
Remember too that QE works well when markets are frozen, and so far
we’re not talking about a recession coming from markets, as in 2008,
but from the real economy. That may imply less satisfactory results
this time round, or if not maybe even bigger balance sheet
expansions.
There is never a good time for a global recession, but 2016 looks
particularly bad.
(The opinions expressed are those of the author, a columnist for
Reuters)
(At the time of publication James Saft did not own any direct
investments in securities mentioned in this article. He may be an
owner indirectly as an investor in a fund. You can email him at
jamessaft@jamessaft.com and find more columns at http://blogs.reuters.com/james-saft)
((jamessaft@jamessaft.com))
(Editing by James Dalgleish)
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