World recession risk – will 2020 be a repeat of 2016?
The year-long trade dispute first dented sentiment, then international trade. Industrial production and investment have now also been affected, while the first cracks in the services sector are starting to appear. In particular, the employment component of the PMI-Services dropped abruptly in September to 50.4 (from 51.2). Although it remains above the 50 threshold, signs of contagion coming from the manufacturing sector are difficult to ignore.
We compare the similarities and differences between today and the previous global economic slowdown in order to identify what factors allowed us to avoid a recession then and if these can be reproduced today. Indeed, the resemblance between the two periods in services sentiment is quite striking. After touching a floor, sentiment improved and a recession was ultimately avoided. So the question is, is a similar rebound be possible today?
In 2015-2016, China was the epicentre of the shock. After the renminbi depreciated, financial market volatility spiked in August 2015 and triggered an increase in global risk aversion, weakening currencies for many emerging markets (EM). The crisis was resolved with a resolute response from the Chinese authorities through monetary, fiscal and capital account measures. Global sentiment bounced back, a recession was avoided and economic growth was underpinned by low oil prices.
These two events appear clearly different in nature. The 2015 episode had a single epicentre: China. Worries about a Chinese economic slowdown triggered a capital flight from China, which progressively impacted neighbouring countries and later advanced economies. This time, the shock is global in nature and will require a global response, fiscal stimulus and an end to trade tensions in order to avoid further deterioration.
All evidence points to synchronised global shocks that are hurting the global economy. First, sentiment was hurt, followed by international trade, and industrial production and investment are progressively affected. Finally, even the more immune services sector is showing some cracks.
In the meantime, the next quarters will likely reflect further economic weakness. Only an end to the trade war and a synchronised fiscal stimulus package seem to be able to prevent a global recession this time. Consequently, we have revised down our world real GDP growth forecast to 3.0% in 2019 (from 3.1%) and 2.9% in 2020 (from 3.3%).