History suggests governments and central banks would do well to sit up and take notice, but with policy coordination at its lowest ebb in decades, a coherent response is unlikely.
With almost $6 trillion (€5.5 trillion) wiped off the value of global stock markets since the start of the year and another 25% off already low oil prices, there is a real risk investor anxiety itself will be the catalyst for a world recession.
And when market turbulence starts to crystallise the very problem investors are worried about— what wonks call a negative feedback loop —then these rare but dangerous spirals in confidence are notoriously difficult to halt.
By any measure, we are in historic territory.Over the past 28 years — or 336 months — only 12 months have seen bigger losses in the MSCI World stock index than January 2016.
Over half of those were associated with major market crises, including the Lehman Brothers bust of 2008 and 2009, the dot.com implosion of 2001 and 2002 and the emerging markets crash of the late 1990s.
Lowering the IMF’s 2016 world growth forecast by another 0.2 percentage points to 3.4%, the fund’s chief economist Maurice Obstfeld said markets were reacting “very strongly” to bits of evidence in a volatile, risk averse climate— but one where little had changed. His predecessor Olivier Blanchard, now writing for Washington’s Peterson Institute, sympathises with that view but warned against ignoring the seizure in markets.
US bank Morgan Stanley said on Tuesday it now sees a 20% chance of a 2016 world recession, as defined by sub-2.5% growth rate that is needed to keep pace with population gains. But why all the new year panic?
China’s deepening slowdown, pressure to devalue its yuan and its increasingly perplexing currency policy are all potential game-changers but have been building for months.
So too has the collapse in oil prices and other commodities, now more than 18 months old albeit a seemingly bottomless slide that is feeding off the China concerns.
These were joined last month by the first rise in US interest rates in a decade which, by bolstering the already pumped-up US dollar, has arguably exaggerated both the oil price fall and China’s yuan conundrum and capital flight.
Add to that potent mix the currency, commodity and interest rate pressures on emerging countries from Russia and Brazil to S Africa and the Gulf, an unwinding of these countries’ sovereign investments overseas, and investor flight from the equity and bonds of energy and mining companies.