Credit Suisse released 2016 Global Outlook report, in which economists and strategists offer insights into the activities and prospects of the world economy next year, as well as developments that may derail those hopes from reality. Two things, reduced Chinese investment spending and the return of core inflation in the United States, become the biggest threat to the global economy next year.
The report, titled “The Resurrection of the Fed” implies that the US central bank, The Federal Reserve (the Fed), becomes the most potent source of the decline of the global economy next year. But not from interest rate policy.
Credit Suisse Chief Economist James Sweeney believes the Fed will raise interest rates four times until the end of 2016, but he does not see this as one of the “gray geese”. The bad credit scenario of Credit Suisse to the 2016 global economy comes when China’s investment spending goes into a comatose status and core inflation in the United States is re-occurring.
According to the report, in the midst of a reorientation of economic growth that focuses on domestic demand, China certainly will not completely shut off the potential credit that encourages investment spending. But, on the other hand, the efficacy of this investment spending has been reduced, let alone investment threatens to aggravate the existing economic imbalances and raise the specter of the financial crisis in China.
Given the large scale of China’s capital formation, Sweeney acknowledged that all assumptions embedded in the report should be evaluated in case of investment contracting or approaching contraction.
Sweeney cautioned that China’s capital spending is greater than US consumer spending on goods. However, this does not mean that Chinese investment has replaced the role of US consumption as a global economic engine.
The important thing to qualify here is in the third quarter, personal consumption spending on services in the United States is almost twice that of consumption for goods.
But if China’s investment is stagnant or shrinking, Credit Suisse estimates that the expansion of global slowdown risks is becoming more visible, assuming this will trigger a global recession as the situation of commodity-exporting countries will continue the bitter year.
“The risk of investment scenarios is contracting low, which has a high impact where investors focus, but we think a rebound in China’s growth early next year, amidst stimulus and global recovery, is far more likely,” Sweeney said.
Less discussed, but more likely to be a source of weakening global economy comes from central bank policies in developed countries, which ultimately get a bigger boost from the inflation they have longed for.
“Another risk scenario that concerns us is the rise in core inflation in developed markets, especially in the United States,” wrote Sweeney and his team.
Then, which scenario is the most frightening of the global economic weakness potential of Credit Suisse version? No one says the two risks will not come true, although Sweeney underlines the scenario is unlikely to happen simultaneously.