Anyone forecasting a global recession is typically met with the same skepticism that doomed the boy who cried wolf. But the lesson from the fable is that the wolf did come, eventually. With the global economy now in its seventh year of a sluggish recovery, the odds of the wolf being near the door are high. In the past 50 years, a global recession has on average hit once every eight years and lasted for about a year. The next recession then may not be far away , but whether it will occur in 2016 is hard to call. However, with China’s debt still growing twice as fast as its economy, the next global recession could well bear the label “Made in China“.
The world economy is currently growing at its weakest pace since it began recovering in 2009, with global GDP growth for 2015 estimated at 2.5% in real terms. But measured in nominal dollar terms, global GDP will likely contract by about 5% this year. This would be just the third time that the global economy has shrunk in nominal GDP terms since 1980.
Global GDP will likely contract by about 5% this year, just the third time it has shrunk in nominal GDP terms since 1980. It’s best hope now is for China to escape a deeper slowdown
The International Monetary Fund has used per capita income and a complex set of other factors to identify various global recessions: in the mid-1970s, the early 1980s, the early 1990s, and then during the global financial crisis of 2008 to 2009. In all those cases, global GDP growth in marketdetermined exchange rate terms fell below 2%, compared to its long-term growth rate of 3.5%. Global growth also dropped under 2% when the US tech bubble burst in 2001. For practical purposes, then, it can be said that there have been five global recessions since 1970.
For most of that period, the United States was the premier economy in the world, and its gyrations always had global ramifications. Much has changed, however, since the global fi nancial crisis of 2008. For the first time in recent history, an economy other than the US has emerged as the largest contributor to global growth, with China accounting for a third of the world’s growth, compared to a 17% con tribution by the US. This is an exact role reversal by the two economies from the preceding decade. The contribution from the other giant economies, Europe and Japan, has fallen to less than 10%.The key to global growth is now in Beijing’s hands.
The problem is that China’s recent economic rise has been facilitated by a massive and unsustainable stimulus campaign. No emerging nation has ever tacked on debt at such a furious pace as China has done since 2008, and a rapid increase in debt is the single most reliable predictor of future economic slowdowns and financial crises. Policymakers in Beijing have been trying to sustain an unrealistic and randomly selected growth target of 7% by steering cheap loans into one bubble after another -first housing, and most recently the stock market -only to see each bubble collapse. While China reported that its GDP grew exactly in line with its growth target of 7% in the first three quarters of this year, all other independently-collated data -from electricity production to car sales -indicate that economy activity is increasing at a pace closer to 5%.
The China slowdown is hitting countries in the developing world the hardest. China is now the top export market for more than 40 developing countries, and that number is up fourfold since 2004. Although barely 5% of India’s exports head to the dragon nation, the slump in global trade partly induced by China’s travails is hurting the Indian economy as well. When India’s economy was growing at 8 to 9% during the boom years of the last decade, its exports were surging at an annual pace of 25%. No economy has sustained an expansion of 8% without a major contribution from export growth. With India’s exports estimated to have fallen by 5% in 2015, little wonder its economy is most likely currently expanding at a 5 to 6% pace (as opposed to the 7 to 8% growth claimed by the dubious official data).
Outside of China, overall growth in the emerging world fell below 2% in 2015, implying that for the first time since the crises of the late 1990s and early 2000s, developing countries are expanding at a pace slower than the developed world. The global economy’s best hope now is for China to escape a deeper slowdown, and for some other major growth engine to get into high gear. While the US is relatively resilient, it still needs to do much better than grow at the current pace of 2% to counteract the slowdown in China. But that seems unlikely given its declining productivity and growth of its labour force. Europe and Japan are showing some signs of economic stabilization, but their growth rates are still too meagre to prevent a further slide in global growth, which in turn would have serious implications for all markets.
As 2015 draws to a close, the global economy is exhibiting few signs to suggest it is breaking out of a rut, with growth still stuck at around 2.5%. With global recession defined as a growth rate of below 2%, the world is just one shock away from drifting into recessionary territory. Another one or two-percentage point drop in debt-laden China’s growth rate could well deliver that jolt.
Sharma is head of Emerging Markets Equity and Global Macro at Morgan Stanley Investment Management
Source: Times of India 27 Dec’2015