While the outlook for global growth remains subdued, markets seem increasingly worried about the risk of a global recession. Indeed, a quantitative assessment on the outlook for growth points to a moderately higher-than-usual risk of a near-term downturn in the global economy, although it is not a certainty at this point.
That’s the assessment of Gustavo Reis, senior international economist at Bank of America Merrill Lynch, who has attempted to evaluate the risk of another global recession occurring.
“Quantifying risks around the 2016 outlook, we confirm that growth risks are biased down”, states Reis.
“Market-based information, however, does not suggest that a recession is baked in the cake. Looking ahead, we remain downbeat on emerging market activity but expect GDP growth to hold at above-trend pace in the largest developed economies. Rather than plunging into recession, the bigger risk is that global growth moderates further despite renewed rounds of policy stimulus, extending the current global malaise”.
While Reis believes the greatest risk at present in a further moderation in growth, something that has been a near constant trend since the financial crisis of 2008/09, using a combination of analyst forecasts and current market pricing, he believes that the risks of a global downturn are higher than usual at present.
“We find a 25% chance of a recession-like slump this year, which is somewhat bigger than the unconditional probability of 20%. Looking further out to next year – and conditional on a 2015 slowdown – the exercise points to only 5% chance of a significant growth dip. This probably reflects some reversal of the headwinds dragging 2015 expectations, such as the marked decline in commodity prices and the deep downturns plaguing Brazil and Russia”, he wrote.
The charts below reveal the expected global growth outlook based on current analyst and market pricing. While risks are slanted to the downside in Reis’ opinion, at present both metrics point to an acceleration in global growth, albeit from low levels.
Reis notes that while past global recessions coincided with significant economic disruption such as spikes in oil prices, tight monetary policy in systemic economies and banking crises, the risk on this occasion is that financial distress in emerging markets pushes the global economy into recession.
However, like others, he believes it is unclear whether factors currently sapping growth in emerging markets such as low commodity prices, increased debt loading, political instability and higher US interest rates will result in a fully-fledged financial crisis, pointing out that “forecasting recessions is nigh on impossible”.
Given the heightened levels of uncertainty, and fragility of the global economy, Reis expects that the ECB and “BRIC” central banks to ease monetary policy further in the year ahead. Over the short term, he believes fluctuating concerns over the health of China’s economy will likely drive asset price movements in the months ahead.
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