Wednesday, September 23, 2015

China: Buiter and Krugman Views

by Bill McBride on 9/23/2015 12:10:00 PM

First, excerpts from Citi's Willem Buiter's: Is China Leading the World into Recession?

In the Global Economics team, however, we believe that a moderate global recession scenario has become the most likely global macroeconomic scenario for the next two years or so. That does not mean that a moderate recession as described in this paper, starting in the second half of 2016, has a likelihood of more than 50%. We do believe that a recession is the most likely outcome during the next few years, but it is important to distinguish between a moderate recession without a regional or global financial crisis and a deep or severe recession accompanied by a regional or global financial crisis.
In our view, the probability of some kind of recession, moderate or severe, is therefore 55%. A global recession of some kind is our modal forecast. A moderate recession is our modal forecast if we decompose recession outcomes into moderate and severe ones and assign separate probabilities to them.

In this publication, we analyse how, starting from where we are now, the world economy could slide into recession, defined as an extended period of excess capacity: the level of potential output exceeds the level of actual output, or the actual unemployment rate is above the natural rate or Nairu. The recession scenario is that of a recession of moderate depth and duration, without a major regional or global financial crisis. We conclude that if the global economy slides into a recession of moderate depth and duration during 2016 and stays there for most of 2017 before staging a recovery, it will most likely be dragged down by slow growth in a number of key emerging markets (EMs), and especially in China. We see such a scenario as increasingly likely. Indeed, we consider China to be at high and rapidly rising risk of a cyclical hard landing.
And excerps from Professor Krugman: Chinese Spillovers
China is clearly in economic trouble. But how worried should we be about spillovers from China’s woes to the rest of the world economy? I have in general been telling people “not very”, although it’s a bigger issue for Japan and Korea. But Citi’s Willem Buiter suggests that it could be a quite big deal, leading to a global recession. And Willem is a very smart guy; read his “Alice in Euroland“, from 1998 (!), warning of the dangers of EMU’s “lender of last resort vacuum.” So could he be right?
Overall, I’m not convinced of the Buiter thesis; China still seems to me not big enough to bring down the rest of the world. But I’m not rock-solid in that conviction, largely because we’ve seen so much contagion in the past. Stay tuned.
CR comment: China is a major concern, but I think a recession in the US in 2016 is very unlikely.