The
Perfect Storm of a Global Recession
by Nouriel Roubini
NEW YORK– The probability is growing that the global economy – not just the
United States– will experience a serious recession.
Recent developments suggest that all G7 economies are already in recession or
close to tipping into one. Other advanced economies or emerging markets (the
rest of the euro zone; New Zealand, Iceland, Estonia, Latvia, and some
Southeast European economies) are
also nearing a recessionary hard landing. When they reach it, there will be a
sharp slowdown in the BRICs (Brazil, Russia, India, and China) and other
emerging markets.
This looming
global recession is being fed by several factors: the collapse of housing
bubbles in the US, United Kingdom, Spain, Ireland and other euro-zone members;
punctured credit bubbles where money and credit was too easy for too long; the
severe credit and liquidity crunch following the US mortgage crisis; the
negative wealth and investment effects of falling stock markets (already down
by more than 20% globally); the global effects via trade links of the recession
in the US (which still counts for about 30% of global GDP); the US dollar’s
weakness, which reduces American trading partners’ competitiveness; and the
stagflationary effects of high oil and commodity prices, which are forcing
central banks to increase interest rates to fight inflation at a time when
there are severe downside risks to growth and financial stability.
Official data
suggest that the USeconomy entered into a recession in the
first quarter of this year. The economy rebounded – in a double-dip, W-shaped
recession – in the second quarter, boosted by the temporary effects on
consumption of $100 billion in tax rebates. But those effects will fade by late
summer.
The UK, Spain, and Irelandare experiencing similar developments, with
housing bubbles deflating and excessive consumer debt undercutting retail
sales, thus leading to recession. Even in Italy, France, Greece, Portugal,
Iceland, and the Baltic states, frothy housing markets are starting to
slacken. Small wonder, then, that production, sales, and consumer and business
confidence are falling throughout the euro zone.
Elsewhere, Japanis contracting, too. Japanused to grow modestly for two reasons:
strong exports to the USand a weak yen. Now, exports to the USare falling while
the yen has strengthened.
Moreover, high oil prices in a country that imports all of its oil needs,
together with falling business profitability and confidence, are pushing
Japaninto a recession.
The last of the
G7 economies, Canada, should have benefited from high energy and
commodity prices, but its GDP shrank in the first quarter, owing to the
contracting USeconomy. Indeed, three quarters of Canada’s exports go to the US,
while foreign demand accounts for a
quarter of its GDP.
So every G7
economy is now headed toward recession. Other smaller economies (mostly the new
members of the EU, which all have large current-account deficits) risk a sudden
reversal of capital inflows; this may already be occurring in Latviaand
Estonia, as well as in Icelandand New Zealand.
This G7 recession
will lead to a sharp growth slowdown in emerging markets and likely tip the
overall global economy into a recession. Those economies that are dependent on
exports to the USand Europeand that have large current-account
surpluses (China, most of Asia, and most other emerging markets) will
suffer from the G7 recession. Those with large current-account deficits (India,
South Africa, and more than 20 economies in East Europefrom the Baltics to
Turkey) may suffer from the global credit crunch.
Commodity exporters (Russia, Brazil, and others in the Middle East, Asia,
Africa, and Latin America) will suffer as the G7 recession and global
slowdown drive down energy and other commodity prices by as much as 30%.
Countries that allowed their currencies to appreciate relative to the dollar
will experience a sharp slowdown in export growth. Those experiencing rising
and now double-digit inflation will have to raise interest rates, while other
high-inflation countries will lose export competitiveness.
Falling oil and
commodity prices – already down 15% from their peaks – will somewhat reduce
stagflationary forces in the global economy, yet inflation is becoming more
entrenched via a vicious circle of rising prices, wages, and costs. This will
constrain the ability of central banks to respond to the downside risks to
growth. In advanced economies, however, inflation will become less of a problem
for central banks by the end of this year, as slack in product markets reduces
firms’ pricing power and higher unemployment constrains wage growth.
To be sure, all
G7 central banks are worried about the temporary rise in headline inflation,
and all are threatening to hike interest rates. Nevertheless, the risk of a
severe recession – and of a serious banking and financial crisis – will
ultimately force all G7 central banks to cut rates. The problem is that,
especially outside the US, this monetary loosening will occur only
when the G7 and global recession become entrenched. Thus, the policy response
will be too little, and will come too late, to prevent it.
**
Nouriel Roubini is Professor of Economics at the Stern School of Business, New
YorkUniversity, and Chairman
of RGE Monitor (www.rgemonitor.com)
Copyright:
Project Syndicate, 2008. http://www.project-syndicate.org/commentary/roubini7
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