Part
of the global economy –especially advanced
economies–
may be stalling into a double-dip recession
That
Stalling Feeling
By
Nouriel Roubini (*)
crisis.blogspot,
June 16, 2011
New
York – Despite the series of low-probability, high-impact
events that have hit the global economy in 2011, financial
markets continued to rise happily until a month or so ago.
The year began with rising food, oil, and commodity prices,
giving rise to the specter of high inflation. Then massive
turmoil erupted in the Middle East, further ratcheting up
oil prices. Then came Japan’s terrible earthquake, which
severely damaged both its economy and global supply chains.
And then Greece, Ireland, and Portugal lost access to credit
markets, requiring bailout packages from the International
Monetary Fund and the European Union.
But
that was not the end of it. Although Greece was bailed out a
year ago, Plan A has now clearly failed. Greece will require
another official bailout – or a bail-in of private
creditors, an option that is fueling heated disagreement
among European policymakers.
Lately,
concerns about America’s unsustainable fiscal deficits
have, likewise, resulted in ugly political infighting,
almost leading to a government shutdown. A similar battle is
now brewing about America’s “debt ceiling,” which, if
unresolved, introduces the risk of a “technical” default
on US public debt.
Until
recently, markets seemed to discount these shocks; apart
from a few days when panic about Japan or the Middle East
caused a correction, they continued their upward march. But,
since the end of April, a more persistent correction in
global equity markets has set in, driven by worries that
economic growth in the United States and worldwide may be
slowing sharply.
Data
from the US, the United Kingdom, the periphery of the
eurozone, Japan, and even emerging-market economies is
signaling that part of the global economy – especially
advanced economies – may be stalling, if not dropping into
a double-dip recession. Global risk-aversion has also
increased, as the option of further “extend and pretend”
or “delay and pray” on Greece is becoming less desirable,
and the specter of a disorderly workout is becoming more
likely.
Optimists
argue that the global economy has merely hit a “soft patch.”
Firms and consumers reacted to this year’s shocks by
“temporarily” slowing consumption, capital spending, and
job creation. As long as the shocks don’t worsen (and as
some become less acute), confidence and growth will recover
in the second half of the year, and stock markets will rally
again.
But
there are good reasons to believe that we are experiencing a
more persistent slump. First, the problems of the eurozone
periphery are in some cases problems of actual insolvency,
not illiquidity: large and rising public and private
deficits and debt; damaged financial systems that need to be
cleaned up and recapitalized; massive loss of
competitiveness; lack of economic growth; and rising
unemployment. It is no longer possible to deny that public
and/or private debts in Greece, Ireland, and Portugal will
need to be restructured.
Second,
the factors slowing US growth are chronic. These include
slow but persistent private and public-sector deleveraging;
rising oil prices; weak job creation; another downturn in
the housing market; severe fiscal problems at the state and
local level; and an unsustainable deficit and debt burden at
the federal level.
Third,
economic growth has been flat on average in the UK over the
last couple of quarters, with front-loaded fiscal austerity
coming at a time when rising inflation is preventing the
Bank of England from easing monetary policy. Indeed,
inflation may even force the Bank to raise interest rates by
the fall. And Japan is already slipping back into recession
because of the earthquake.
All
of these economies were already growing anemically and below
trend, as the ongoing process of deleveraging required a
slowdown of public and private spending in order to increase
saving rates and reduce debts. And now, in addition to the
string of “black swan” events that advanced economies
have faced this year, monetary and fiscal stimulus has been
removed in most of them, or soon will be.
If
what is happening now turns out to be something worse than a
temporary soft patch, the market correction will continue
further, thus weakening growth as the negative wealth
effects of falling equity markets reduce private spending.
And, unlike in 2007-2010, when every negative shock and
market downturn was countered by more policy action by
governments, this time around policymakers are running out
of ammunition, and thus may be unable to trigger more asset
reflation and jump-start the real economy.
This
lack of policy bullets is reflected in most advanced
economies’ embrace of some form of austerity, in order to
avoid a fiscal train wreck down the line. Public debt is
already high, and many sovereigns are near distress, so
governments’ ability to backstop their banks via more
bailouts, guarantees, and ring-fencing of questionable
assets is severely constrained. Another round of so-called
“quantitative easing” by monetary authorities may not
occur as inflation is rising – albeit slowly – in most
advanced economies.
If
the latest global economic data reflect something more
serious than a hiccup, and markets and economies continue to
slow, policymakers could well find themselves empty-handed.
If that happens, the risk of stall speed or an outright
double-dip recession would rise sharply in many advanced
economies.
(*) Nouriel
Roubini is Chairman of Roubini Global Economics (www.roubini.com),
Professor of Economics at NYU’s Stern School of Business,
and co-author of Crisis Economics (recently republished in
paperback).
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