Citigroup Predicts 55% Risk in China Recession

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CHIIn an analysis published late on Tuesday, the New York-based bank’s chief economist, Willem Buiter, said there is a 55 percent chance of some form of global recession in the next couple of years, most likely one of moderate depth and length.

Willem Buiter Photographer: Patrick T. Fallon/Bloomberg

Unlike the U.S.-driven international slumps of the past two decades, this one will be generated by sliding demand from emerging markets, especially China, which has surged in size to become the world’s No. 2 economy.

“The world appears to be at material and rising risk of entering a recession, led by EMs and in particular by China,” wrote Buiter, a former U.K. policy maker.

Among reasons for worry is his view that in reality China is already growing closer to 4 percent than the government’s goal of about 7 percent targeted for this year. A shallow recession would likely occur if expansion slowed to 2.5 percent in the middle of next year and stayed there, he said.

Other emerging markets such as Brazil, South Africa and Russia are already in trouble while developed economies are still lackluster. Commodity prices, trade and inflation remain sluggish and corporate earnings are slowing.

Frequent Outlier

Buiter is a frequent outlier. Counterparts at Goldman Sachs Group Inc. and JPMorgan Chase & Co. are playing down the risk posed by China to rich economies, while those at Societe Generale SA said this week that they envisage just a 10 percent chance of a new global recession with cheap oil providing a buffer against the emerging market weakness. In July 2012, Citigroup was warning of a 90 percent chance Greece would leave the euro only to be proved wrong.

In the case of China, Buiter reckons it’s facing a “high and rapidly rising risk of a cyclical hard landing” given excess capacity and debts in key sectors as well as corrections in the markets for stocks and real estate.

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