[THS] Nouriel Roubini: Double-Dip Days

Wed Jul 21 13:19:23 CEST 2010

http://www.informationclearinghouse.info/article25967.htm

Double-Dip Days

By Nouriel Roubini

July 19, 2010 "Project Syndicate" July 16, 2010 -- NEW YORK – The global economy,
artificially boosted since the recession of 2008-2009 by massive monetary and fiscal
stimulus and financial bailouts, is headed towards a sharp slowdown this year as the
effect of these measures wanes. Worse yet, the fundamental excesses that fueled the
crisis – too much debt and leverage in the private sector (households, banks and
other financial institutions, and even much of the corporate sector) – have not been
addressed.

Private-sector deleveraging has barely begun. Moreover, there is now massive re-
leveraging of the public sector in advanced economies, with huge budget deficits and
public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian
fiscal stimulus, and the immense costs of socializing the financial system’s losses.

At best, we face a protracted period of anemic, below-trend growth in advanced
economies as deleveraging by households, financial institutions, and governments
starts to feed through to consumption and investment. At the global level, the
countries that spent too much – the United States, the United Kingdom, Spain,
Greece, and elsewhere – now need to deleverage and are spending, consuming, and
importing less.

But countries that saved too much – China, emerging Asia, Germany, and Japan –
are not spending more to compensate for the fall in spending by deleveraging
countries. Thus, the recovery of global aggregate demand will be weak, pushing
global growth much lower.

The global slowdown – already evident in second-quarter data for 2010 – will
accelerate in the second half of the year. Fiscal stimulus will disappear as austerity
programs take hold in most countries. Inventory adjustments, which boosted growth
for a few quarters, will run their course. The effects of tax policies that stole demand
from the future – such as incentives for buyers of cars and homes – will diminish as
programs expire. Labor-market conditions remain weak, with little job creation and a
spreading sense of malaise among consumers.

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if
we avoid a W-shaped double dip. In the US, annual growth was already below trend
in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2%
in April-June). Growth is set to slow further, to 1.5% in the second half of this year
and into 2011.

Whatever letter of the alphabet US economic performance ultimately resembles, what
is coming will feel like a recession. Mediocre job creation and a further rise in
unemployment, larger cyclical budget deficits, a fresh fall in home prices, larger
losses by banks on mortgages, consumer credit, and other loans, and the risk that
Congress will adopt protectionist measures against China will see to that.

In the eurozone, the outlook is worse. Growth may be close to zero by the end of this
year, as fiscal austerity kicks in and stock markets fall. Sharp rises in sovereign,
corporate, and interbank liquidity spreads will increase the cost of capital, and
increases in risk aversion, volatility, and sovereign risk will undermine business,
investor, and consumer confidence further. The weakening of the euro will help
Europe’s external balance, but the benefits will be more than offset by the damage to
export and growth prospects in the US, China, and emerging Asia.

Even China is showing signs of a slowdown, owing to the government’s attempts to
control economic overheating. The slowdown in advanced economies, together with
a weaker euro, will further dent Chinese growth, bringing its 11%-plus growth rate
towards 7% by the end of this year. This is bad news for export growth in the rest of
Asia and among commodity–rich countries, which increasingly rely on Chinese
imports.

An important victim will be Japan, where anemic real income growth is depressing
domestic demand and exports to China sustain what little growth there is. Japan also
suffers from low potential growth, owing to a lack of structural reforms and weak and
ineffective governments (four prime ministers in four years), a large stock of public
debt, unfavorable demographic trends, and a strong yen that gets stronger during
bouts of global risk aversion.

A scenario in which US growth slumps to 1.5%, the eurozone and Japan stagnate,
and China’s growth slows below 8% may not imply a global contraction, but, as in
the US, it will feel like one. And any additional shock could tip this unstable global
economy back into full-fledged recession.

The potential sources of such a shock are legion. The eurozone’s sovereign-risk
problems could worsen, leading to another round of asset-price corrections, global
risk aversion, volatility, and financial contagion. A vicious cycle of asset-price
correction and weaker growth, together with downside surprises that are not
currently priced by markets, could lead to further asset-price declines and even
weaker growth – a dynamic that drove the global economy into recession in the first
place.

And one cannot exclude the possibility of an Israeli military strike on Iran in the next
12 months. If that happens, oil prices could rapidly spike and, as in the summer of
2008, trigger a global recession.

Finally, policymakers are running out of tools. Additional monetary quantitative easing
will make little difference, there is little room for further fiscal stimulus in most
advanced economies, and the ability to bail out financial institutions that are too big
to fail – but also too big to be saved – will be sharply constrained.

So, as the optimists’ delusional hopes for a rapid V-shaped recovery evaporate, the
advanced world will be at best in a long U-shaped recovery, which in some cases –
the eurozone and Japan – may be long enough to stretch into an L-shaped near-
depression. Avoiding double dip recession will be difficult.

In such a world, recovery in the stronger emerging markets – the great hope for the
global economy – will suffer, because no country is an island economically. Indeed,
growth in many emerging-market economies – starting with China – is highly
dependent on retrenching advanced economies.

Fasten your seat belts for a very bumpy ride.

Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at
the Stern School of Business, New York University, and co-author of the book Crisis
Economics