Last month when Citi Research forecast that a global recession is likely in coming years, Martin Wolf, the chief economic commentator of the Financial Times wrote tha the case was plausible. "This does not mean we must expect a recession. But people should see such a scenario as plausible." On Tuesday Willem Buiter, Citi’s chief economist and a former professor at the London School of Economics and Political Science, teaching political economy, told a Milken Institute conference in London (see video below) that the global economy faces a period of below potential growth and declining trade next year as emerging nations struggle with tightening monetary policy.

 

The Dutch national who was a member of the first Bank of England Monetary Policy Committee, added that countries like the US and the UK might not feel the full effects of a recession but he said that global growth would be "well below trend" with a "widening output gap." Buiter said there would a whole range of other "dysfunctionalities" that have been building up since the global financial crash of 2008.

Citi's Sept 2015 paper says: "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. Growth is likely to bottom out in 2017 and start recovering again from late 2017 or early 2018. The output gap could be closed (the world exits recession) late 2018 or 2019."

Dr Buiter says China’s growth is overstated by official statistics and may be currently as low as 4%.

Global growth for 2015 is projected at 3.1%, down 0.2% percentage points from its July forecast of 3.3% growth, according to the IMF's latest World Economic Outlook (WEO) report, published last week.

Gavyn Davies, the UK economist, in his FT blog notes that Buiter's definition of “recession” is much milder than that of many economists — e.g. two consecutive quarters of economic contraction. "He says that a recession occurs whenever GDP growth falls below trend for a meaningful period, even if the absolute level of GDP does not decline. On that definition, we have probably already entered a global 'growth recession.' Indeed, the world economy might trigger this threshold about half of the time in a normal cycle."

Davies concludes: "although the world economy is losing momentum, and recession risks for the emerging world are fairly high, a “serious” global recession still seems like a fairly low risk. What these models would miss, however, is a serious recession that stems from a shock that has not yet happened, or from the promulgation of financial shocks between countries that have not been identified in the past."

On Tuesday in dollar terms, China reported that imports dipped 20.4% from a year earlier to $145.2bn, reflecting lower commodity prices and weaker domestic demand.

Exports were better than expected but that data signalled China’s third-quarter growth figures due to be released next week will likely fall below Beijing’s target of about 7% for the whole year.

“Exports in September look a little better than expectations,” said HSBC economist Ma Xiaoping, adding that year-end trade figures tend to pick up due to Christmas shipments. “But if you factor in seasonal factors, I don’t see much improvement in global demand,” she added.

According to the General Administration of Customs, Chinese exports dropped 3.7% in September from a year earlier in US dollar terms following a 5.5% dip in August. The country's trade surplus nearly doubled to $60.34bn.

In yuan-denominated terms, imports fell by 17.7% while exports were down 1.1%.

Citi Buiter, China recessionThe Paris-based International Energy Agency, the energy watchdog for 28 industrialised countries including Ireland, reports that global oil demand growth is expected to slow from its five-year high of 1.8 mb/d in 2015 to 1.2 million barrels per day (mb/d) in 2016 — closer towards its long-term trend as previous price support is likely to wane, the IEA Oil Market Report for October informed subscribers. Recent downgrades to the macroeconomic outlook are also filtering through.

World oil supply held steady near 96.6 mb/d in September, as lower non-OPEC production was offset by a slight increase in OPEC crude.

Non-OPEC accounted for just under 40% of the 1.8 mb/d annual increase in total oil output. Lower oil prices and steep spending curbs are expected to cut non-OPEC output by nearly 0.5 mb/d in 2016.

OPEC crude supply rose by 90 0000 barrels per day (90 kb/d) in September to 31.72 mb/d as record Iraqi output more than offset a dip in Saudi supply. A slowdown in forecast demand growth and slightly higher non-OPEC supply lowers the 2016 “call” on OPEC by 0.2 mb/d from last month’s Oil Market Report to 31.1 mb/d.

Martin Wolf writes today:

"China might be able to sustain growth of real demand at 7% a year. But for an economy investing well over 40% of gross domestic product, even this would mean rising excess capacity. It is also far easier to imagine a decline in China’s investment relative to its savings than the opposite. In other words, China is almost certain to suffer from a worsening demand shortfall in the next few years. Meanwhile, capacity is certainly going to rise in many emerging economies. In all, the world’s glut of potential supply seems sure to worsen. This is why disinflationary pressures are so likely to rise worldwide."

 

Moderated by Zanny Minton Beddoes, Editor in Chief, the Economist
Willem Buiter, CBE, Global Chief Economist, Citi
Sir Paul Collier, CBE, Senior Fellow, Milken Institute; Professor of Economics and Public Policy, Blavatnik School of Government, University of Oxford
Larry Hatheway, Group Chief Economist, GAM
Ana Palacio, Member, Spanish Council of State

After more than a decade of accumulation, foreign exchange reserves have started to decline. Michala Marcussen, chief economist at Societe Generale Commercial and Investment Bank, tells John Authers of the FT how this reflects the rebalancing of the Chinese economy: