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Recession ahead? How to resolve economic 'trifurcation'

Uncertainty and pessimism have dominated the economic and business news in recent months. At face value the mood seems justified as many negative factors (China's financial gyrations, volatility in oil prices, weaker growth in the U.S, and new clouts over Europe's banks and debts) are colluding. Talk about an imminent recession is intensifying, and recession risk probabilities are creeping up – although still low.

At 2.5 percent global GDP growth for 2016, The Conference Board's current projection is slightly below our November 2015 estimate of 2.8 percent. It is also slightly below the average of 2.6 percent for the past four years – already taking into account significantly lower GDP growth rates for China compared to the official estimates since 2011.


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So how much lower can it go? When will a bear market, or even a stock market recession, turn into a global economic recession? It's sometimes argued that at 2.5 percent GDP growth, which is what we are at now, the world could be called in recession as per capita income growth rates may go negative in many countries. Such shorthand is tricky, as population growth is quite weak in the world's largest economies, so that per capita income growth may well continue in the range of 1.5 to 2 percent for this year.

Indeed despite all the horrible economic news since the start of the year, consumers have been holding up surprisingly well. While the expectations of American consumers on business conditions and jobs weakened slightly over the course of 2015, consumer confidence has stayed clear from recession territory. Even globally, in about two thirds of 61 economies around the world surveyed by Nielsen, global consumers saw an increase in confidence over the whole year 2015.

So which memo did the consumers not receive? Why aren't they much more worried by investors who are wringing their hands over a possible recession? The answer is that for most consumers, who are still rebuilding their balance sheets from the hit of several years ago, the value of their homes and their labor count for a lot more than the value of stocks. And low prices, cheap gas, and some wage increases all help. U.S. consumer spending in January even recovered from December, and most forecasts project it to remain fairly solid at 2.5 percent over the remainder of the year.

Meanwhile, financial markets worry about many things, including low oil prices, earnings, negative interest rates, bank reforms and so on. And finally, investors have finally come to realize that monetary easing can no longer be the only game in town. The wait for a more conducive environment characterized by fiscal and structural policy reforms will be a long one.

Investors need to come to terms with the reality that overall weak growth is turning out to be quite persistent. For now, this is as good as it gets – something most consumers, workers and homeowners already knew from their own experiences.

In contrast to consumers, business leaders have been captured most intensely by the recent pessimism. CEO Confidence has been on the decline for several quarters, with CEOs showing widespread concerns about emerging markets and lower expectations for the United States and Europe as well. The Conference Board CEO Challenge® survey for 2016, which garnered responses from 605 CEOs around the world, shows that slowing growth in emerging markets, volatility in cash flow, currency volatility, financial instability in China and wage inflation are among the largest business concerns.

So, what does business know that consumers do not? For one, while low inflation is good for the consumer, it is bad for business, as it reduces pricing power and investment incentives. The price-lowering effect of digital technology also increases pressure on margins for many companies. And low oil prices, which have been a boon to consumers and energy-intensive companies, are increasingly hurting businesses linked to oil production, including oil explorers, engineering, logistics and transportation.

Moreover business is beginning to feel, however slightly, cost pressures from rising wages. In the United States, where unemployment is dropping precipitously, employment costs rose 2 percent in 2015, well above the record lows of the post-recession years.

So what is next? While the risk of an imminent global economic recession remains low, this trifurcation of the global economy cannot continue for all that much longer. Consumer optimism is a fragile phenomenon and can easily turn sour. Investors' herd behavior can do a lot of damage to a global economy still in its aftermath And once weak business confidence brings the already weak investment growth to a halt, the outcome can be much worse than one might reasonably expect.

To resolve the trifurcation, it is important that investors and business leaders focus their attention on the medium-term forces that are causing slow growth. The impact of those slowing forces on business growth is much more gradual than that of a recession, and some of those forces are already in play.

The actions to undertake are to broaden the investment agenda to innovation and human capital, counter slow productivity growth and face the labor force challenges of slowing demographics that are depressing growth in labor supply. Understanding and, where possible, mitigating those forces is the important task ahead of us.

Commentary by Bart van Ark, chief economist and chief strategy officer, The Conference Board, where he leads a global team of two dozen economists who produce a range of widely watched economic indicators and growth forecasts, as well as in-depth global economic research. Follow him on Twitter @bart_ark.

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