Analysts at Citigroup have indicated the world economy is in a “death spiral.” Fueled by continually dropping oil prices and dreary outlook across the world, global recession may be imminent.
Mere weeks after the Royal Bank of Scotland strongly urged its customers to “Sell Everything,” Citigroup has decided to extend a similarly ominous outlook. In a report released Thursday, the bank used the words, which might induce a panic attack. Strategists at the bank stated that the global economy has become “trapped” in a vicious and self-destructive “death spiral.”
Analysts at Citigroup have expressed fear over the unending circle of circumstances that are increasingly leading the world’s economies to a near certain duration of extreme recession. The markets are increasingly finding themselves under the steadily intensifying influence of a strong U.S. dollar, lower commodity prices, weak trade, and declining growth in emerging markets, reported HNGN. Such circumstances could further drive down the oil prices, which are already reaching historic lows, noted Citi strategists led by Jonathan Stubbs,
“Weak global growth spurs demand for the U.S. dollar; a stronger U.S. dollar drives down the global price of commodities; and low commodity prices hurt developing economies dependent on exporting raw materials, thereby weakening global growth, which spurs demand for the U.S dollar, ad infinitum. This process repeats until we arrive at ‘Oilmageddon,’ an economic apocalypse defined by perpetually low oil prices and a ‘significant and synchronized’ global recession and a proper modern-day equity bear market. It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets. The world appears to be trapped in a circular reference death spiral.”
Stubbs noted that macro strategists at Citi have forecasted that dollar could begin a reversal this year. On the other hand, the oil prices may have already reached rock bottom and they would have nowhere to go but up, reported Yahoo.
Crude oil prices have nosedived by almost 70 percent since mid-2014, reported CNBC. During the same time, U.S. dollar has risen by around 20 percent against majority of world currencies. The International Monetary Fund expects world economy to grow from its present rate of 3.1 percent in 2015, to 3.4 percent in 2016 and 3.6 percent in 2017. However, Citi strategists have painted a gloomier outlook expecting the world economy to progress at a regressive and sluggish pace of just 2.7 percent in the current year. Despite the bleak outlook, Citi’s report predicts that the global economy will find its way out of this trap owing to the wise policymakers, who will undoubtedly find a way out of the otherwise disastrous status quo, added Stubbs,
“The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail.”
However, it certainly won’t be an easy task, continued Stubbs,
“It seems reasonable to assume that another year of extreme moves in U.S. dollar (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop [and] make it very difficult for policy makers in emerging markets and developing markets to fight disinflationary forces and intercept downside risks. Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon”.
As always, oil producers, who have hereto continued pumping the black gold in the hopes of driving out new competitors and maintaining the dominance of OPEC, will slowly cut costs as well as production. Oil prices have been hovering around the $30 mark, which needless to say is way below the $120 to $140 the commodity commanded in early 2014.
Strangely, while China is currently in a great position to buy oil to fuel its factories, its economy isn’t great. Owing to a global slowdown and poor regional capital flow, the Asian country is struggling. This has had a cascading effect around the globe, writes Stubbs,
“The stakes are high. Perhaps higher than they have ever been in the post-World War II era.”
[Photo by Saul Gravy / Getty Images]