Is The Global Economy Caught In A 'Death Spiral'?

| by Kathryn Schroeder
Global CurrencyGlobal Currency

The global economy is in a “death spiral” that could bring about a recession, according to Citi analysts.

"The world appears to be trapped in a circular reference death spiral," Citi strategists led by Jonathan Stubbs said in a Feb. 4 report obtained by CNBC.

"Stronger U.S. dollar, weaker oil/commodity prices, weaker world trade/petrodollar liquidity, weaker EM (and global growth)... and repeat. Ad infinitum, this would lead to Oilmageddon, a 'significant and synchronized' global recession and a proper modern-day equity bear market."

Citi analysts are not alone in their hypothesis.

In January, chartered financial analyst, Adam Hayes, wrote on Investopedia about six factors pointing to a global recession in 2016. They include the persistent sovereign debt crisis in the European Union, the growth of the Chinese economy that has led to inadequate investment opportunities which may cause a bubble burst sending the country’s economy into a recession that will “drag down the rest of the world,” the U.S. student loan debt crisis, unemployment in the U.S., the inability of central banks to stimulate economic growth and recurring patterns in economic data that have predicted recessions in the past.

“We may be on the verge of another global recession,” Hayes wrote. “Patterns in economic data are showing signs of weakness, and the troubles persisting in Europe or the bubble bursting in China may be the trigger that sends the economy over the edge. Unlike in 2008, when central banks were able to lower interest rates and expand their balance sheets, central banks now have much less elbow room to enact loose monetary policy to prevent a recession from happening."

Hayes added that, "Recessions are a normal part of the macroeconomic cycles that the world experiences, and happen from time to time. The last recession was already seven years ago. Signs may show that the next is right around the corner."

Stubbs thinks that if the U.S. dollar weakens and oil prices find their bottom, the global recession may not happen.

“The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” Stubbs said in the report.

Citi forecasts that the world economy will grow by only 2.7 percent in 2016, and that policymakers will attempt to “regain credibility” early in the year.

“This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets,” Stubbs said. "The stakes are high, perhaps higher than they have ever been in the post-World War II era."

Sources: CNBC, Investopedia / Photo Source:

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