Cebr estimates that the risk of a global recession in the next two years has risen from a fifth a year ago to a third this autumn. Not only are global business cycles maturing but trade conflicts, Eurozone problems and emerging market crises could combine to tip the world into a downturn.

 

The technical IMF definition of a global recession is a contraction of Purchasing Power Parity adjusted World GDP per capita accompanied by a decline in at least one additional global macroeconomic indicator such as per‑capita investment, per‑capita consumption, industrial production or trade flows. Since World War II, the world has seen only four global recessions on this definition, in 1975, 1982, 1991 and 2009.

 

Predicting the exact timing of the next recession is difficult but it has become clear over the summer that there are five substantial downside risks to the global growth outlook over the next two years.

 

First, the two biggest economic powers of our times are entangled in a trade dispute that has escalated into a full-blown trade war in recent weeks. Alibaba’s founder Jack Ma said recently that the conflict may last 20 years, as both sides seem unable to back down or compromise. Since most of the tariffs have only been in place for a few weeks, most of the consequences are yet to show in official data. Still, recent indicators such as the Caixin Manufacturing PMI are already starting to show the impacts on Chinas productive sector. And Cebr analysis last week showed that knock-on effects will hurt economies worldwide.

 

Secondly, in Europe, the battle between the Eurozone establishment and the government coalition in Italy is warming up. The Coalition is budgeting for an annual deficit of 2.4% over the next three years, even on what in Cebr’s view are overoptimistic growth assumptions. This at its best would stabilise the debt-to-GDP ratio at its current level 132%, more likely the ratio will rise. Following the announcement, the spread between Italian 10-year bonds and German bunds has risen to more than 300 basis points, partly reflecting slower ECB purchases of Italian bonds to put pressure on the government. We believe that a crunch between Italy and Brussels will happen but more likely in 2019 or 2020 than this year.

 

Third, international equity markets are looking very fully priced, with a market downturn on the cards, which would affect confidence and spending.

 

Fourth, monetary data is indicating a contraction in the world’s money supply as interest rates rise. US M1 growth was 3.9% in the year to August; China’s M2 growth was 6.6% in June, half its rate a year earlier; Eurozone M3 growth has fallen from around 5% in 2016 and 2017 to 4% in July.

 

Finally, emerging markets across the world are struggling, partly because of the monetary tightening in the US and the knock-on effect of the surging US dollar. At the beginning of 2018, Cebr expected a decline in GDP in the year in only 4 countries – Venezuela, Puerto Rico, Equatorial Guinea and North Korea. It now looks as if South Africa, Iran and Argentina at least will join them with growth in countries like Turkey trending towards stagnation. Oil at over $80 as a result of the sanctions on Iran is exacerbating the squeeze on living standards in oil importing countries via currency weakness.

 

With debt high and many of the structural problems that caused the great recession still in existence, a global recession could be more difficult to resolve than its predecessors. The scope for fiscal and monetary activism is limited. And there is a risk that recession could boost populist and nationalist policies that in turn will exacerbate the economic problems.

 

Author: Cebr Managing Economist Kay Neufeld, kneufeld@cebr.com no.: 020 7324 2841

You can also contact Cebr Deputy Chairman Douglas McWilliams, dmcwilliams@cebr.com 020 7324 3860