Will High Risk Events Trigger a Recession

I. GLOBAL ASSESSMENT AND OUTLOOKIn the first quarter of 2015, economic growth in the major countries, which maintain quarterly national accounts, was weaker than in any quarter since the end of the great recession. Revised and more complete estimates of real GDP show negative growth rates in the United States and Canada and anemic growth rates in most of the other countries.In the worldwide business cycle, the group of the Englishspeaking countries has led historically global economic activity. Monthly predictive analytics signal an underlying weakness for several months in the English-speaking countries, which have posted negative or steadily declining growth rates in their leading indicators.Globally, trade predictive analytics, which summarize worldwide merchandize exports, clearly point out an undergoing global slowdown contradicting the mediacreated myth of transitory snowstorms in New England as the cause of an economic downswing in the United States in the first quarter of this year. In March of this year, global exports, on a year-to-year basis, declined by 12.4%, the sixth consecutive monthly decline in a row following an expansion since October 2014. On a quarterly basis, in the first quarter of 2015 global exports dropped 10.2% from a year ago to $3.7 trillion, following a 2.6% decline in the last quarter of 2014. A major trigger for such dramatic changes in each county's business cycle has been the burst of the oil-price bubble coupled with currency realignments from the strengthening of the U.S. dollar as well as a slowdown in the growth in emerging economies.In addition to geopolitical risks related to the Middle East and Eastern Europe, there is high probability of one or more policy-created bubbles bursting this year. A hard landing in China from housing prices and/or stock market corrections; disintegration of the Euro Area; high debtto-income ratios-both private and public-in several countries; and the timing of an exit from an ill-conceived and permanent-perceived monetary policy of zero interest rates in the United States. Any of these events may trigger a significant correction in stock markets leading to another major recession with no tools left for economic policy.Assigning a 40% probability that any of these events will come suddenly into play this year and thus the risks will be gradually and orderly managed over the long run, we consider the current global economic slowdown to be a soft patch, which will maintain over the forecast horizon the ongoing moderate six-year-old path of recovery. Under these conditions, the baseline forecast predicts worldwide output to increase by just 2.7% in 2015, which is 0.5% below the moderate growth of 3.3% in 2014. Under this scenario, global economic growth is expected to stay on the existing trajectory for the rest of the decade with low investment, slowing productivity, lack of job creation, declining real wages, and halving of the growth in international trade from its established long-term trend for decades before the great recession.In the inflation front, the effect of lower energy prices has evaporated as oil prices quickly ended their free fall. It is expected over the forecast horizon oil prices will fluctuate around one-half of their latest peak. Inflationary expectations have begun to build up again driven by rising labor costs from social pressures in a climate of declining or stalling productivity.II. SHORT-TERM INDICATORS AND FORECASTSThe baseline forecast incorporates major findings of the World Economic Survey conducted in the second quarter of 2015 by the Center for Economic Studies (CES) at the Ludwig Maximilian University and the German Ifo Institute. About 1,100 executives from 115 countries have indicated that the world's economic climate edged up for a second quarter in a row after tumbling in the last quarter of 2014. The major findings of the second quarter's survey are as follows:* Worldwide, executives evaluated the current economic situation, second quarter of 2015, to be slightly above satisfactory levels, led by an improvement in consumer expenditures while capital expenditures remain below satisfactory levels. …

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