Wealth Management Singapore

Nouriel Roubini warns risk of double-dip recession is rising

1 CommentWednesday • August 26, 2009 • by marco

Nouriel Roubini, generally hailed for predicting the financial crisis that has swept the world over the past two years, said there was now “a big risk” that the global economy would slip into a W-shaped recession. However, he puts forth reason why he believes it will be U-shaped, anaemic and below trend for at least a couple of years.

He commented on 3 questions. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?

Looks like the global economy will bottom out in the second half of 2009. US, UK, Spain, Italy, other eurozone members and some European emerging market economies recovering next year. Australia, Germany, France and Japan; China, India, Brazil and parts of Asia and Latin America this year.

He argues against majority economic consensus who expect a V-shaped recovery supporting a it U-shaped. Following are the points

First – Employment is still falling

Second – crisis of solvency. True deleveraging has not begun yet because losses have been socialised and put on government balance sheets

Third – developed countries faces both current account deficits and falling asset prices

Fourth – the financial system is still severely damaged

Fifth – weak corporate profitability for some time

Sixth – public sector fiscal deficits masks required recovery in private sector spending. Effects of policy stimulus will fizzle out by next year

Seven – time required for domestic demand in current account surplus countries to rise

Risk of double-dip recession comes as governments and policymakers are facing the twin threat of both stag-deflation and stagflation.

Stag-deflation(recession and deflation) – take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery

Stagflation – maintain large budget deficits, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.

He added that another reason to fear a double-dip recession was the rise in oil, energy and food prices, which he said were “now rising faster than economic fundamentals warrant.” He said the global economy could not withstand another oil shock, with prices heading towards $100 a barrel.

Posted in: Economy

Tagged with: Market Updates