Willem Buiter, Citigroup’s chief economist since 2010 and former BoE Monetary Policy Committee member, believes there is a 55% chance of a global recession in 2016 or 2017. He thinks unlike most recessions which emanate from the US, the next one is likely to result from a slowdown in China and the build-up of excess manufacturing capacity there. The risk of what’s known as an economic hard landing is “high and rapidly rising” and he estimates China’s growth rate is already at 4%, well below the official target of 7%. The slowdown in China would be transmitted to the rest of the world’s economies as global trade drops away, given China accounts for roughly one seventh of it and financial markets would become involved if China started selling its massive holdings of US Treasury bonds.
He views the Chinese economy as “a messy market economy of the state-capitalist/crony-capitalist variety” and is sceptical of the effectiveness of Chinese policy. “The policy response to the weakening of domestic and external demand in China is likely to be too little and too late.” Beijing’s recent handling of its housing sector, share market bubble and the devaluation of the yuan, “don’t inspire confidence in the ability of the authorities…”
As the effects flowed to the rest of the world, developed nations would lack policy options. “Today, the interest rate is out of commission as a policy instrument in most developed markets and fiscal space is more severely constrained than in 2008 almost everywhere,” he says. The only lever left for the central banks in Europe, the United States and Japan to extend bond purchases although he views this policy as becoming incrementally less effective. Even so “this will not be enough to prevent most advanced economies from performing worse in 2016 and 2017 than in 2015”.