China on track for recession in autumn – risk of ‘entrenched inflation’ for whole world

Nathan Sheets says China 'well below' their growth target

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China has seen a significant slowdown in services and manufacturing due to a drop in sales caused by global inflation around the world. Fears are mounting over the probability of China’s slowing economy could plunge the whole world into a recession that could aggravate the cost of living crisis. China, the world’s largest economy, has seen its GDP target for 2022 fall from 5.5 percent to 3.9 percent – increasing the risk of a global recession. A report by the global bank Citi has found the world faces a 50/50 chance of falling into recession.

Speaking to CNN, Citi Global Chief Economist Nathan Sheets said: “For the moment, I am much more worried about the strength of Chinese activity.

“Over the last couple of months, we marked down our growth outlook for China appreciably. And now we’re well below, we’re 3.9 percent for this year – well below their 5.5 percent growth target.

“But if we don’t see more economic stimulus there, there is a meaningful risk that that ultimate number might be even lower than 3.9 percent. We’re seeing a distinct slowing in China’s economy.

“And if you took that and layered it down on the other risks that are here right now: central banks tightening, inflation, energy prices, and overall uncertainty if we get a Chinese recession on top of that, then I think we need to mark up those probabilities – recession – even more than we are at the moment.”

“So, it’s really about Chinese stability, the Chinese economy,” Mr Sheets added.

Citi report states the likelihood of recession now is a coin flip 50/50.

When asked about his perspective on the data, Mr Sheets said: “I think the bottom line from our report is that we see appreciable recession risk in the global economy.

“And quite frankly, my sense is that that recession risk is rising. And fundamentally, it is attributable to this very high global inflation that is occurring and is manifesting itself in many different places in many different ways around the globe.”

Mr Sheets said: “And then central banks being called into action. And central banks are responding very vigorously.

“They learned from their predecessors in previous generations that high, sustained inflation is very painful for the public and very painful for the economy.

“And they’re doing everything they can now to ensure that this inflation does not become entrenched. And that’s the challenge of the economy – its rates are rising. And financial markets are responding adversely as a result of that.”

On the timing and how fast a recession could happen, Mr Sheets said: “The risk of self-fulfilling onward adjustment in the consumer spending is something I am quite worried about.

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“Now, at the moment, I would say the good news is that we’re seeing a meaningful rebalancing through the summer towards services and toward tourism, travel and restaurant

“People are taking the holidays, the vacations that they postponed for the last several years through the pandemic.

“But as we get into the fall, it is possible that we see a sharper contraction in consumer spending and recession rests rise on the back of higher inflation, cutting into real incomes and reducing purchasing power.

“But also, as you point out, on the back of consumer just kind of getting nervous about the whole contours of the economic situation and pulling back even more than one might have predicted.”

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