WILL CHINA LEAD THE WORLD TO ANOTHER RECESSION? CITIGROUP RESPONDS

If the global economy slips into a moderately deep recession next year, it will most likely be dragged down by shrinking growth in major emerging markets - especially a recession in China, says Willem Buiter, chief economist at Citigroup.

Buiter, who is also a former member of the Bank of England's interest rate-setting committee, said in a note that the bank believes there is a high and rising likelihood of a Chinese, emerging market and global recession scenario playing out.

Worries over a steep slowdown in China's economy - the second largest in the world after the U.S. - has rolled over global markets in recent months.

Deepening those concerns, data issued on Tuesday signaled the country's dollar-denominated exports dropped by 5.5 percent in August from a year earlier, while imports plunged almost 14 percent.

Although, a global recession is not yet reflected in Citi's benchmark forecasts for global or Chinese growth in 2016, Citi's global economics team has supported this view.

In his opinion, what is more likely is global real gross domestic product growth (GDP) dipping consistently over the next few years, dropping to or below 2 percent around the middle of 2016.

He also noted, however, that the possibility of some kind of recession, moderate or severe, was 55 percent.

If the world economy slips into a recession, generally identified by two straight quarters where GDP falls, it will be the emerging markets. Particularly, China will lead the road, Buiter said.

"We consider China to be at a high and rapidly rising risk of a cyclical hard landing," the Citi note said.

"The reasons behind China's downturn and likely recession are familiar from the long history of business cycles everywhere: rising excess capacity in a growing number of sectors, excessive leverage in the private sector and episodes of irrational exuberance in asset markets."

One of the asset markets Citi referred to was the equity market. Having soared some 60 percent between the start of the year and June, China's benchmark Shanghai Composite gauge then dropped sharp and fast.

Earlier this week, China revised down its forecast for economic growth this year to 7.3 percent from 7.4 percent.

Buiter said that if China enters a recession, many emerging markets will probably follow.

"The advanced economies or developed markets (DMs) will not have enough resilience, either spontaneous or policy-driven, to prevent a global slowdown and recession, even though many large DMs will not experience recessions themselves but will merely grow more slowly," he added.

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SWITZERLAND MAY FACE FIRST RECESSION IN SIX YEARS. THANKS, FRANC!

The data is due on Friday, and many analysts now expect gross domestic product to have shrunk 0.1 percent in last quarter, a second consecutive contraction that would mark the first recession in six years.

Seven months after the central bank removed its currency cap, Switzerland is dealing with declining exports, stagnant manufacturing and plunging prices.

The local currency has appreciated 11 percent against the euro since the central bank’s unexpected January 15 decision to opt for a free float.

The central bank also cut its deposit rate to a record low of minus 0.75 percent and pledged currency interventions as needed. Its next rate decision is on Sept. 17, and Jordan said that a policy change isn’t imminent.

For SNB President Thomas Jordan, who has defended the decision, the weaker near-term backdrop will match his assessment when policy-makers gather in three weeks for their quarterly policy meeting.

In an interview with UnternehmerZeitung last week, Jordan said that the current monetary policy is taking today's difficult situation into account. “We expect the economy to return to a growth path in the second half of the year.”

A number of economists, however, consider that the fall may be short-lived, predicting growth of 0.1 percent this quarter and 0.2 percent in the last three months of the year.

Although growth is expected to resume, surveys indicate a subdued recovery. A manufacturing index has signaled contracted almost every month this year and consumer confidence dipped to its lowest in more than three years in July.

The slowdown in China could hamper economic momentum, as global demand will become unpredictable, analysts say.

In July exports of watches to eight leading Asian markets dipped, with China tumbling almost 40 percent. Overall exports to China dropped 1.7 percent last month. Shipments to the euro area in the first half, which account for 44 percent of sales abroad, fell 8 percent.

Swiss companies have been looking to Asia to offset weakness in Europe, with Switzerland clinching a free-trade agreement with the world’s second-largest economy last year, Bloomberg reports.

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