Roubini Says The Risk of A Double-Dip Recession Is Rising
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This weekend Nouriel Roubini, the NYU professor who predicted the financial crisis, wrote in the Financial Times that the chance of double-dip recession is increasing.
Roubini raises three questions regarding the economic outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?
On the first question he thinks it looks like the global economy will bottom out in the second half of 2009. He says there are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere, unemployment will be above 10% by 2010. This is bad news for demand and bank losses.
He says there is a crisis of solvency, not just liquidity, because true deleveraging has not begun yet because the losses of banks have just been put on government balance sheets. This inhibits the ability of banks to lend, households to spend and companies to invest. He thinks the effects of the policy stimulus, will fizzle out by early next year, requiring greater private demand to support continued growth.
He is concern at the weak profitability of companies. "...owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest" said Roubini.
Roubini says there are now two reasons why there is a rising risk of a double-dip W-shaped recession. Below is what he had to say, "For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).
But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.
Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel."
You can see the full piece .
Roubini raises three questions regarding the economic outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?
On the first question he thinks it looks like the global economy will bottom out in the second half of 2009. He says there are several arguments for a weak U-shaped recovery . Employment is still falling sharply in the US and elsewhere, unemployment will be above 10% by 2010. This is bad news for demand and bank losses.
He says there is a crisis of solvency, not just liquidity, because true deleveraging has not begun yet because the losses of banks have just been put on government balance sheets. This inhibits the ability of banks to lend, households to spend and companies to invest. He thinks the effects of the policy stimulus, will fizzle out by early next year, requiring greater private demand to support continued growth.
He is concern at the weak profitability of companies. "...owing to high debts and default risks, low growth and persistent deflationary pressures on corporate margins – will constrain companies’ willingness to produce, hire workers and invest" said Roubini.
Roubini says there are now two reasons why there is a rising risk of a double-dip W-shaped recession. Below is what he had to say, "For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).
But if they maintain large budget deficits, bond market vigilantes will punish policymakers. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation.
Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel."
You can see the full piece .
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