Like many diseases, recessions take advantage of the excesses and abuses we indulge in when we are healthy, when we think we are invincible. Like many diseases, recessions don't announce themselves with trumpet blasts but work in silence initially. Even when they produce the first symptoms, they can easily be mistaken for trivial ailments or seasonal ailments. However, the opposite also happens, namely that trivial ailments or seasonal ailments are mistaken for symptoms of serious illness. Or that even debilitating and disabling, but not fatal, diseases are mistaken for the beginning of the end and that the patient asks himself (and asks his doctor) the cruelest question for no reason. How much do I have left? Despite medical advances, correct diagnosis is still an art rather than a science. But besides the objective difficulties, there are many subjective issues.
A doctor can exaggerate the seriousness of the situation because he is anxious himself, because he wants to scare the patient to induce him to take more care or because he has a conflict of interest and wants to spend money on useless tests and treatments. Sometimes there is a fine line between anxiety, the will to cover one's back and the ambition to get noticed. In the last twenty years we have witnessed the emergence of numerous new limited epidemics (Sars, avian flu, spongiform encephalopathy, Ebola) and every time someone has stood up, even very authoritative, to announce a pandemic comparable to the Black fish. Being the first to warn can be a sign of responsibility, but it can also be useful for one's career and, if the grim prediction comes true, obtain a mention in the annals of the history of medicine, a monument and dedicate it to one's name by a hospital, a street or square. For our part, we are more concerned about the world's structural ills and low economic and earnings growth looming over the medium-term horizon than about an imminent relapse into a global recession comparable to the one we just exited. .
However, we consider the idea of a useful stimulus and provocation willem buiter, a former central banker and chief economist at Citi, of a China-led recession in 2016-2017. Although often prone to pessimism, Buiter is a brilliant man of great substance. Buiter gives a 40 percent probability to a scenario in which global growth dips below 2 percent over the next year. The starting point is a hard landing by China, a contagion extended to all emerging countries and a consequent slowdown in all developed countries. That said, Citi's official forecast for 2016 is global growth of 2.5 (already adjusted downwards to account for dubious Chinese statistics) versus 2.6 in 2015. That the world is teetering between opposing forces, positive and negative, it is a fact and the possibility that the negative ones prevail must be taken into account. However, it seems to us at least early to declare them winners. Let's take a short trip around the world to try and verify the situation. Let's start with China.
Here the most frequent observation among dedicated sinologists, those who try to collect data outside the official statistics, is that the worsening of the slowdown occurred earlier this year and that in the second and third quarters there was a some stability. Sure, Chinese manufacturing will grow at a similar rate to global growth from now on, but services are showing signs of excellent health. The emerging countries that depend on China are currently worse off than the China itself because they lack the strength to balance the decline in the extractive sector with services. Some of them, on the other hand, continue to follow populist and anti-business policies. Others like Mexico, which have more balanced policies, are absorbing the crisis quite well. As for developed commodity exporting countries (Australia, New Zealand, Canada, Norway), the devaluation and revival of non-extractive manufacturing will take time to produce their positive effects. Eventually, more balanced economies will emerge.
Coming to the United States, as he points out Ethan Harris of Bank of America, in the past five years there has been a systematic overestimation of growth prospects, regularly disappointed in the final balance, but now it is moving to the opposite excess. The Fed will raise rates even more than the market expects, but this will not stop the economy moving forward, which will grow above potential in 2016 as well. The strength of consumption, real estate and services will offset the deceleration in manufacturing Growing above potential does not mean ruining the engine but raising inflation which will probably reach and perhaps exceed 2 percent next year. Even the latest European data confirm that the acceleration impressed by Quantitative easing was not ephemeral and still give reasonable hope that 2016 will be even better. As for recent developments in the automotive sector, some have taken advantage of them to envisage the end of diesel, the crisis of the entire sector, the arrest of the development of Germany and therefore of Europe and the world.
Others recalled the recent case of General Motors, fined only one billion for a problem even more serious than that attributed to Volkswagen. Honestly, it seems too early to assess the implications of the scandal, which are more likely to be relevant to industry earnings than eventual sales. Overall, therefore, today Europe and America are healthy, a China in trouble but still growing, a Japan that will try to restart Abenomics in crisis and the majority of emerging countries in rather serious difficulties. Let's remember that Europe (and not China as is often said) is the second largest economy in the world and that therefore they are the first two economies to do well. The burden of proof, at the moment, therefore, falls on those who fear a recession. This does not mean that particularly bright months are ahead for the stock exchanges. Without the explicit support of central banks (even if the Fed's postponement of rate hikes signals that there is still a lot of attention to market trends) equities will have to find a balance between continued growth and a rising inflation. As for bonds, obvious beneficiaries (with the exception of credits) of any slowdown, the penalization of prices in the event of stable growth and a recovery in inflation will be limited by the fact that real rates will probably become even more negative.
