The bank thinks that a moderate recession has become a most likely scenario in the upcoming months mostly because of significant slowdown in EM (especially because of BRIC countries: Brazil, Russia, India and China). Quoting precisely:
“The main driver of global underperformance during the past two years has been EM weakness. No EM of any significant size is outperforming our forecasts since the beginning of the year or earlier; most are underperforming. Even the success stories, like India, central and eastern Europe, and to a certain extent Mexico, are not outperforming our forecasts. Brazil and Russia are in recession, and GDP growth there has turned negative. South Africa is in a recession, with output below potential and output growth below potential output growth. The most significant underperformer is China. For reasons explained earlier, we don’t think there is much point in forecasting official GDP growth. We therefore focus on our best guess as to the ‘true’ growth rate of real GDP, which, as noted earlier, is probably somewhere around 4% now.”
Indeed Citi points at important and crucial facts to macro assessment of the global economy. Such headwinds as contracting industry and falling international trade are hints that outlook is not as bright as some central banks do see.
What’s more important Citi thinks that it is possible that the Fed can start another round of QE!
“We expect to see QE #N, where N could become a large integer, as part of the monetary policy response in the US and the UK, and QEE2 in Japan. The ECB will likely have to continue its asset purchases beyond September 2016 and it may cut its policy rates further. All this will not be enough to prevent most advanced economies from performing worse in 2016 and 2017 than in 2015, and worse than our current forecasts for the next two years.”
No matter if one agrees with the above or not, markets are surely entering an interesting period.