Trying to explain the current and future state of the global economy is no easy task. But this was the challenge set before Nouriel Roubini as he took the stage to close this year’s ExpoManagement in Madrid. Roubini became a household name as one of the few economists to have predicted the global economic crisis that hit in 2008. Known by the moniker “Dr. Doom”, his reputation is one of an untra-realist who is not afraid to say things as he sees them.
His style is direct and to the point. He doesn’t sugar coat. Instead he lays out the situation as he sees it without pulling punches. His hour long, whirlwind tour of the global economy, required his audience to hold on tight in order to keep up – the amount of ground he covered was considerable, and made one realize just how many interconnected elements there are shaping our economic future in the short, medium and long term.
His words were always going to have a special resonance to the Expomanagement audience in Spain, a country whose current economic problems are well documented and seemingly far from being resolved. But what he had to say during his hour long key note speech was fascinating to anyone with an interest in possible future scenarios for the global economy.
Read on to discover just what he had to say, including:
- 5 reasons why the Eurozone recession is only likely to get worse
- 2 future scenarios for the Eurozone
- The outlook and challenges for the USA, Middle East and emerging markets
- 5 reasons for optimism for the future
Why the Short-Term Outlook for the Eurozone is Bleak
1) Fiscal austerity. The paradox is that austerity is necessary to reduce debt in the Eurozone periphery countries (Greece, Portugal, Spain, Italy etc.), but in the short run, raising taxes and cutting spending makes the recession worse. Even necessary structural reforms have an initial negative effect e.g. bringing more flexibility to the labor market in Spain has had the initial impact of increasing unemployment
2) Value of the Euro. Germany is uber-competitive and can work with the euro at its current value. The periphery countries can't. Roubini suggests the natural level for the euro at the present time is around parity with the dollar. Only then will countries be able to start reducing their structural debts. European Central Bank monetary policy, however, means that this devaluation process is currently too slow.
3) Banks. Many banks, especially those in the periphery have liquidity problems and are under-capitalized. This means they are reluctant to lend, and so reducing the amount of credit that is available to drive growth
4) Oil Prices. The price of oil at around US$100 is still too high. This has a particular impact on the Eurozone where nearly 100% of its oil is imported.
5) Political and policy uncertainty. In the political arena there is a clash between austerity fatigue in the periphery and bail-out fatigue in the core. Austerity fatigue impacts governments in the periphery whose electorate blame austerity for making the recession worse. Bail out fatigue impacts those at the core whose tax payers have had enough of lending to countries like Greece and Portugal.
2 scenarios for the Future of the Eurozone
Roubini reserved harsh criticism for the leaders of the 17 Eurozone countries for their inability to reach agreement on what to do next. He identified two possible ways that the scenario will play out:
1) Move forward: Implement policies that promote growth, competitiveness, balance and integration. He points out that historically no monetary union has ever succeeded without fiscal and political union. The mistake of the European Union was in not developing common spending, regulation and taxation policies. The big question is whether there is the political will to do this now and to save the Eurozone.
2) Disintegration: After four years, governments are running out of policy bullets to tackle the crisis. Interest rates have been cut to 0%, there has been quantitive easing, fiscal stimulus, bail outs… what is left? There are very few rabbits to pull out of the policy hat.
Roubini claims that Greece’s case is hopeless and he expects the country to leave the Eurozone within the next 18 months. And whilst he claims the Euro can survive the exit of smaller countries, if Italy or Spain were forced to leave then that would mean the end for the single currency as we know it today.
The State of the World Beyond the Eurozone
While the US economy is growing, it is an anemic growth with unemployment remaining stubbornly high. Roubini identifies three reasons why 2013 could see a downturn.
1) The US has postponed fiscal austerity, effectively stealing growth from the future. At some point the US will have to deal with its debt. A further downgrading of US debts remains a very real possibility.
2) Private spending has been sustained by tax cuts paid for by public debt. When tax cuts expire next year it will negatively impact disposable income
3) Political gridlock between Democrats and Republicans means that achieving any kind of effective policy consensus is impossible
With tensions between Israel (supported by a belligerent US) and Iran over nuclear proliferation there remains a risk of war that would have a massive impact on oil prices. At the same time, revolution and civil war in the rest of the region means it is a constant source of geo-political risk.
Helped by lower debt, higher growth potential and increased scope for policy stimulus, the recovery in emerging markets had until recently been strong . But countries like India, China, Brazil, Mexico and Argentina have seen growth slowing in recent months. Roubini identifies two reasons behind the slowdown:
1) Eurozone recession and weak growth in the US and Japan. Economic troubles elsewhere have led to a sharp reduction in exports from emerging markets .
2) Postponement of structural reforms. Encouraged by the success of China’s so-called “state capitalist” model, many emerging countries are pursuing interventionist policies which are stunting the development of their private sectors
5 Reasons to Be Positive
1) The global economy is recovering. The US, Japan and especially emerging markets are all growing. This is creating new and varied poles of economic growth meaning that firms in advanced economies that have a global outlook have excellent prospects for success
2) Success stories. Amongst emerging markets, Roubini highlights Brazil, Colombia, Peru and Uruguay as emerging economies that are reforming in the right direction. Within Europe he highlights countries such as Poland, the Czech Republic and Kazakhstan. In sub-Saharan Africa there is more stability, less war and a rising middle class. Whilst even in the Middle East there is still considerable wealth that can be used to drive growth
3) The balance sheets of corporations are in good shape. In contrast to many governments, corporations have trillions of dollars on their balance sheets offering considerable potential for investment
4) Ongoing globalization. Information technology means that there is now more trade in services and capital, more labor mobility, and more trade in news and technology.
5) Technological innovation. New energy technology, bio technology and information technology are creating the industries of the future
Roubini acknowledged that the positives are all longer term trends whilst the possible downsides are all much shorter term problems.
Quoting Keynes’ famous phrase “in the long run we’re all dead”, Roubini warned that today the risk is the opposite- that we “die” in the short run. He urged policy makers to show the necessary leadership that will allow us to survive these short-term risks and so allow us to take advantage of the positive underlying long term trends.
Can this be achieved? We’ll only find out in the coming months.