Financial markets are trapped in a “death spiral,” according to analysts at Citigroup.
The bank’s research team described a “negative feedback loop” in the global economy and across financial markets. It is fueled by strong dollar, lower commodity prices, weak trade and declining growth in emerging markets.
The four forces are interconnected and present central banks with the difficult task of fighting deflation and staving off another global downturn, the bank said in a report, released Friday.
If the loop continues, Citi warns, the world could slip into “significant and synchronized” global recession.
The bank even invented a new term for its doomsday scenario: “oilmageddon.”
“It seems reasonable to assume that another year of extreme moves in USD (higher) and oil/commodity prices (lower) would likely continue to drive this negative feedback loop,” analysts Jonathan Stubbs, Ayush Tambi and Nikhil Jadhav wrote.
“Corporate profits and equity markets would also likely suffer further downside risk in this scenario of Oilmageddon,” they added.
Oil prices have dropped more than 70% in the last 18 months, to just over $31 per barrel.
The collapse in prices gave a boost to the countries that import oil — like China and India. But Citi said the size of the price moves caused a slowdown in trade and capital flows, which is hurting the global economy.
Still, Citi offers a glimmer of hope, saying the situation might get better in 2016.
“Oil prices are likely bottoming. Greater stability lies ahead for FX and commodity markets. The death spiral is in nobody’s interest. Rational behavior, most likely, will prevail,” they say.