A headline about the global stocks selloff on the Times Square “Zipper” in New York on Aug. 24.MIKE SEGAR/Reuters
China's deteriorating economy, deepening troubles across much of the rest of the emerging markets, more easing by a rash of central banks and mixed signals even in recovering economies like the United States have heightened fears that the world is plunging toward another global recession.
The Federal Reserve's recent decision to delay a long-expected rate hike has played into those worries. And bearish assessments from a handful of economy watchers have done nothing to lighten the mood. Citigroup chief economist Willem Buiter is remarkably precise in his latest forecast, pegging the chances of a global slump over the next couple of years at 55 per cent.
But the markets have been overreacting to the spate of bad news, argues Jean Boivin, deputy chief investment strategist with BlackRock Investment Institute.
"That's not our baseline for sure," said Mr. Boivin, who counts himself among the glass-half-full crowd.
And even if investors concluded that China was a lot weaker than anyone expected – "and I don't think we have the evidence to suggest that yet" – it doesn't explain why markets have veered from relative complacency to outright panic in the blink of eye when the underlying fundamentals have scarcely changed, Mr. Boivin said in an interview at BlackRock's Toronto office.
"I don't think this is all emerging markets and China that is driving it," said Mr. Boivin, a former deputy governor of the Bank of Canada and senior federal finance official.
"There's an unusually high degree of uncertainty about the [global] outlook. And it's of a different nature than in normal times. We typically think of global GDP growing 5 per cent [annually]. And then you get news, and maybe you revise it to 4.5 per cent."
Yet half a dozen years since the Great Recession, the consensus is for continuing slow global growth with a few bumps along the road, a gradual return to 2 per cent inflation and a gradual improvement in historically low productivity rates.
But what's unusual is that there is a remarkably wide range of views about the outlook. Mr. Boivin, most central bankers and plenty of analysts are in the modest growth camp, while the naysayers expect the sky to fall. No one is predicting a stunning turnaround in global fortunes.
"In that world, when data comes in, it has an outsize impact on the market, because we are all trying to figure out not if we should shave or add a bit to the forecast but whether we're in one world or the other."
Mr. Boivin has some soothing news for fellow Canadians worried about those growth bumps turning into a fresh recession, particularly after the economy shrank in the first half of the year.
In a low-growth era, "we're more likely to see negative quarters of growth more frequently," said Mr. Boivin, who is based in London. He was in Toronto to meet BlackRock clients and talk about market puzzles at an Economic Club of Canada lunch.
"In a world like this, getting two consecutive quarters of negative growth might not have the same meaning as it had in the past. And yet I'm not sure that we have fully adjusted our thinking to the fact that we are in this low-growth environment."