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 History suggests governments and central banks would do well to sit
up and take notice, but with policy coordination at its lowest ebb
in decades, a coherent response is unlikely.
With almost $6 trillion wiped off the value of global stock markets
since the start of the year and another 25 percent off already low
oil prices, there is a real risk investor anxiety itself will be the
catalyst for a world recession.
And when market turbulence starts to crystallize the very problem
investors are worried about -- what wonks call a negative feedback
loop -- then these rare but dangerous spirals in confidence are
notoriously difficult to halt.
By any measure, we are in historic territory.
Over the past 28 years -- or 336 months -- only 12 months have seen
bigger losses in the MSCI World stock index than January 2016. Over
half of those were associated with major market crises, including
the Lehman Brothers bust of 2008/09, the dot.com implosion of
2001/02 and the emerging markets crash of the late 1990s.
Lowering the International Monetary Fund's 2016 world growth
forecast by another 0.2 percentage points to 3.4 percent this week,
IMF chief economist Maurice Obstfeld said markets were reacting
'very strongly' to bits of evidence in a volatile, risk averse
climate -- but one where little fundamental had changed.
His predecessor Olivier Blanchard, now writing for Washington's
Peterson Institute, sympathises with that view but warned against
ignoring the seizure in markets.
"How much should we worry? This is where economics stops giving an
answer," Blanchard said.
"If ... the stock market slump lasts longer or gets worse, it can
become self-fulfilling. Low stock prices lasting for long lead to
lower consumption, lower demand, and, potentially, to a recession."
U.S. bank Morgan Stanley said on Tuesday it now sees a 20 percent
chance of a 2016 world recession, as defined by sub-2.5 percent
growth rate that is needed to keep pace with population gains.
FEAR ITSELF?
But why all the new year panic? Most economists blame a confluence
of events rather than any sudden shock.
China's deepening slowdown, pressure to devalue its yuan and its
increasingly perplexing currency policy are all potential
game-changers but have been building for months.
So too has the collapse in oil prices and other commodities, now
more than 18 months old albeit a seemingly bottomless slide that is
feeding off the China concerns.
These were joined last month by the first rise in U.S. interest
rates in a decade which, by bolstering the already pumped-up U.S.
dollar, has arguably exaggerated both the oil price fall and China's
yuan conundrum and capital flight.
Add to that potent mix the currency, commodity and interest rate
pressures on emerging countries from Russia and Brazil to South
Africa and the Gulf, an unwinding of these countries' sovereign
investments overseas, and investor flight from the equity and bonds
of energy and mining companies.
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Everyone can see a spiral forming, but few see where it ends. The
threat of a major re-set of global market valuations amid high
volatility is enough for many conservative investors to go to ground
until it all plays out.
The now famous "sell (mostly) everything" note issued by Britain's
RBS last week was not a mere throwaway. It focused on the risk of
markets snowballing as world trade and credit growth struggle,
currency wars go up a gear and China and oil feed off each other. A
10-20 percent stock reversal was its best guess.
"The world is in trouble," it said.
If so, where's the cavalry?
By consensus, there appears to be about as much chance of a
confidence-boosting grand economic policy agreement this year as
there is of oil prices returning to $100 a barrel.
Coincidentally, China chairs the G20 group of world economic powers
this year. Finance chiefs meet in Shanghai next month.
But internal dilemmas mean global coordination is likely to be low
on Beijing's priority list.
The U.S. Federal Reserve also paid little heed to international
concerns when hiking rates last month, while Saudi Arabia has shown
scant consideration for other oil exporters as it plays out a crude
price war to protect market share against U.S. shale producers.
Germany has been at loggerheads with much of the rest of the euro
zone and G7 partners for years over fiscal policy and austerity.
Harvard economist Jeffrey Frenkel notes that global economic
cooperation has been stymied by international differences and
domestic political divisions on policy, as well as growing
disagreement between economists on how to model the world.
"When two players sit down at the board, they are unlikely to have a
satisfactory game if one of them thinks they are playing checkers
and the other thinks they are playing chess," he wrote in a paper
this month.
(Additional reporting by Jamie McGeever; Editing by Catherine Evans)
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