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What to Watch to See If World Economy Is Heading Into Recession

Simon Kennedy

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The hottest topic in global financial markets is whether the world economy is heading for recession, but defining such a slump is easier said than done.

The marker for most developed economies is two successive quarters of contracting gross domestic product. In the U.S., it’s the lagging decision of a panel of academics formed by the National Bureau of Economic Research.

Calling a recession for the whole world is a lot harder. Once it was a case of tracking powerhouses such as the U.S. and Germany, but emerging markets now account for a bigger share of global GDP and a slump by them to even moderate expansion rates is a problem. China, for example, would be ringing alarm bells well before its economy actually started shrinking.

A decade ago, when the world was last in a downturn, the International Monetary Fund sought to redefine a global recession having previously used growth beneath 3% as benchmark.

In the April 2009 study, its economists decided that declining per-capita GDP was the main indicator to monitor along with the global rates for unemployment, trade, industrial production and oil demand.

Applying such criteria points to global recessions in 1975, 1982, 1991 and 2009, the latter being the worst since the Great Depression. Some economists include 2001.

So what’s the current outlook? While the IMF is this week set to cut its forecasts for global growth this year from 3.2%, which is already the weakest since 2009, it’s not declaring a recession is on the horizon. Managing Director Kristalina Georgieva for now prefers to warn of a “synchronized slowdown.”

Economists at Danske Bank A/S have though developed a traffic-light indicator based on the IMF’s five measures. As recently as the first half of 2018, all was fine with every metric on “green.” But as of the second quarter, falling trade is flashing “red” and the others “yellow.”

That’s enough for them to warn of a 30% chance of a global recession over the next two years.

“While the momentum in the global economy has clearly slowed over the recent year, we still think the risk of a global recession is only about 30% over the next two years,” said Jakob Ekholdt Christensen, Danske’s head of international macro. “One reason is that we still see scope for central banks and national governments to stimulate their economies to mitigate a possible further downturn. The biggest risk to the global economy in our view is a further escalation of the trade war between the U.S. and China.”

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editors responsible for this story: Stephanie Flanders at flanders@bloomberg.net, Fergal O'Brien, Brian Swint

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