The outlook for the global economy next year is darkening, with a U.S. recession and China becoming the first major emerging market to slash interest rates to zero both potential scenarios, according to Citi.
As the U.S. economy enters its seventh year of expansion
following the 2008-09 crisis, the probability of recession will
reach 65 percent, Citi's rates strategists wrote in their 2016
outlook published late on
A rapid flattening of the bond yield curve towards inversion
would be a key warning sign.
"The cumulative probability of U.S. recession reaches 65 percent
next year," Citi's rates strategists wrote in their 2016 outlook
published late on Tuesday.
"Curve inversion will likely come more quickly than the
Normally, short-dated yields such as two-year yields are lower
than longer-dated ones like 10-year yields, as investors demand
a premium for taking on risk several years into the future. The
curve has inverted before each of the last five U.S. recessions
since the mid-1970s.
In China, deflationary pressures and downside risks to growth
will force Beijing to loosen fiscal policy, let the yuan
depreciate and perhaps become the first major emerging market
economy to cut interest rates to zero, Citi said.