They call economics the “dismal science,” and it’s practitioners are living up to that designation lately.
The latest warning about the health of the global economy has been raised by Citigroup economists Ebrahim Rahbari, Willem Buiter, and Cesar Rojas who argue in a report issued Wednesday that a the chance of a global recession is a “high and rising risk for 2016 and perhaps 2017,” despite the fact that they don’t think that advanced economies like the United States will dip into negative growth territory.
How does a global recession occur without the largest economies shrinking? First of all, it comes down to the fact that there is no standard understanding of the definition of a recession on a global scale. The folks at Citi define it as growth below 2%, which doesn’t sound so bad to us Americans. After all, we’re pretty used to 2% growth these days.
In fact, global growth dipping below 2% is quite rare. Here’s a chart from a paper Citi released back in October, which shows real global growth going back to 1970, both in absolute and per capita terms:
As you can see, negative global growth is not very common, and so the definition of a recession that is used in developed economies, i.e. two consecutive quarters of negative growth, just isn’t that useful in a global context. Each time that global growth has dipped below 2%, however, it has roughly coincided with recessions in the American economy.
But the second reason the global economy is slowing even as the U.S. and other developed market are continuing to grow is this: Growth in China and the rest of the emerging markets matter to the world economy today than forty years ago. The fact that we’re so close to this critical mark now—global growth was at exactly 2.0% in the fourth quarter of 2015—without nearing a contraction in the American economy is a testament to that. As Citi economists write:
The weakness in the global economy in recent years has mainly been driven by the manufacturing sector (in a broad range of countries) and [emerging markets]. But most recently weakness appears to be spreading to [advanced economies] and to the services sector.
What’s even more concerning to the folks at Citi is that the developed world seems to have no plan to fight a global recession if it does occur. They continue:
Risks to the economic outlook are exacerbated by concerns that an appropriate countercyclical policy responses would be lacking or that the policy response would be ineffective in a number of countries, including the US, the euro area, Japan, the UK, and China. To avoid a recession and to avoid a greater slowdown in potential output growth than is warranted because of worsening demographics, the world needs a global version of what we would call ‘Abenomics plus’: expansionary or accommodating monetary policy, a fiscal stimulus and structural reform—but with far more serious structural reform and extended to include material deleveraging.
But all through the developed world there is no political consensus over what can be done to boost growth. This is no clearer in any country than the United States, where the 2016 presidential election is gearing up to be one in which the two major parties are offering the largest difference in economic policy proposals in modern history.
Let’s pray that a global recession does not come to pass, because there’s little chance that the U.S. government, Europe, or Japan has the wherewithal or political will to fight it.