Some analysts — including those at Citi — have turned bearish on the world economy this year, following an equity rout in January and weaker economic data out of China and the US.
“The world appears to be trapped in a circular reference death spiral,” Citi strategists led by Jonathan Stubbs said in a report on Thursday.
“Stronger US 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.”
“The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” he said in the report.
Crude oil prices have tumbled by around 70 percent since the middle of 2014, during which time the US dollar has risen by around 20 percent against a basket of currencies.
By contrast, Citi forecasts the world economy will grow by only 2.7 percent in 2016 having cut its outlook last month.
Stubbs added that policymakers would likely attempt to “regain credibility” in the coming weeks and months.
“This is fundamental to avoiding a proper/full global recession and dangerous disorder across financial markets. The stakes are high, perhaps higher than they have ever been in the post-World War II era,” he said.
Just 151,000 new jobs were created in January in the US, in the latest sign that the world’s biggest economy is slowing. Economists are concerned about an industrial or manufacturing recession in the country, following some warnings from companies in earnings seasons and recent weak manufacturing activity and durable goods orders data.
However, some analysts say markets are overegging the prospect of a global slump.
“Many markets are now pricing in a significant probability of recession and when we talk about recession, we’re talking particularly about a U.S. recession. Do you think that is likely or not? To me, the odds are too high; the market is pricing too high a probability,” Myles Bradshaw, the head of global aggregate fixed income at Amundi, told CNBC this week.