Thursday 27 October 2016

Citigroup cuts forecasts as it warns of world on edge of recession

Published 22/01/2016 | 02:30

A trader watches events at the New York Stock Exchange. Photo: Bloomberg
A trader watches events at the New York Stock Exchange. Photo: Bloomberg

Banking giant Citigroup has warned the risks of a global recession are increasing as it cut its growth forecasts marginally.

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The downgrade includes cuts to forecasts for the US, UK, Canada and a range of emerging markets. The analysis, prepared primarily by the bank's top economist Willem Buiter, says that despite disappointing growth, it does not expect major new easing by the main Central Banks as a whole.

The Federal Reserve remains likely to hike rates further, while the Bank of England and Bank of Japan are both on hold, it said. And while further measures are expected from the ECB, they will be incremental rather than a "big bazooka", Mr Buiter said.

The global growth forecast has been cut from 2.8pc to 2.7pc, with below consensus forecasts in many major economies.

"Risks of global recession are rising," the research note said. "Available data for Q4-2015 suggest that the global economy is currently on the edge of recession."

Citibank said the last few years have seen an "uneasy" equilibrium between repeated disappointment in global growth and offsetting monetary policy stimulus. That stimulus, it argues, has helped keep global growth trundling along at about 2.5pc year-on-year.

"However, that balance is now at risk, with rising downside risks to global growth plus the prospect that central bank policy stimulus will be less forthcoming than in recent years," the analysis states.

Citi forecasts the Chinese economy to remain sluggish as credit stimulus fades, the aftermath of the country's recent massive credit boom weighs on demand, and the country's economy changes to one focused more on services.

The Citi analysts warn that debt levels in China have risen to worrying levels, with the debt-to-GDP ratio substantially above levels in the US and Europe.

"The full extent of China's slowdown remains hard to gauge, given uncertainties over the accuracy of the official GDP data," the investor note said.

"However, side-effects of China's slowdown are evident in the weakness of other emerging markets and world trade."

The banking giant pointed out that although China accounts for about 15pc of global GDP, its slowdown is a "first-order shock" to global growth, "given the extent to which global growth has been China-dependent in recent years."

It said that China's growth has directly contributed roughly 1 percentage point a year to global GDP growth over the last five years, accounting for roughly two-fifths of total global growth.

"China's overall impact may well be bigger, given its indirect boost to activity elsewhere."

Citigroup is putting a British withdrawal from the EU at between 20pc and 30pc, which it said was not "implausible".

"Brexit, if it happens, would probably trigger extended economic weakness for the UK, a sizeable drop in sterling, plus a major political crisis, with the resignation of PM Cameron and the prospect of a second, successful Scottish referendum on independence," the bank said.

Irish Independent

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