For those interested here's latest from Roubini:
http://www.ft.com/cms/s/0/90227fdc-900d ... abdc0.html
The risk
of a double-dip recession is rising
By Nouriel Roubini
Published: August 23 2009 18:55 | Last updated: August 23 2009 18:55
T he global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression. In the fourth quarter
of 2008 and first quarter
of 2009 the rate at which most advanced economies were contracting was similar to the gross domestic product free-fall in the early stage
of the Depression. Then, late last year, policymakers who had been behind the curve finally started to use most
of the weapons in their arsenal.
That effort worked and the free-fall
of economic activity eased. There are three open questions now on the 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 it looks like the global economy will bottom out in the second half
of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end
of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts
of Asia and Latin America) the recovery has already started.
On the second issue the debate is between those – most
of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple
of years, after a couple
of quarters
of rapid growth driven by the restocking
of inventories and a recovery
of production from near Depression levels.
There are several arguments for a weak U-shaped recovery. Employment is still falling sharply in the US and elsewhere – in advanced economies, unemployment will be above 10 per cent by 2010. This is bad news for demand and bank losses, but also for workers’ skills, a key factor behind long-term labour productivity growth.
Second, this is a crisis
of solvency, not just liquidity, but true deleveraging has not begun yet because the losses
of financial institutions have been socialised and put on government balance sheets. This limits the ability
of banks to lend, households to spend and companies to invest.
Third, in countries running current account deficits, consumers need to cut spending and save much more, yet debt-burdened consumers face a wealth shock from falling home prices and stock markets and shrinking incomes and employment.
Fourth, the financial system – despite the policy support – is still severely damaged. Most
of the shadow banking system has disappeared, and traditional banks are saddled with trillions
of dollars in expected losses on loans and securities while still being seriously undercapitalised.
Fifth, weak profitability – 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.
Sixth, the releveraging
of the public sector through its build-up
of large fiscal deficits risks crowding out a recovery in private sector spending. The effects
of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.
Seventh, the reduction
of global imbalances implies that the current account deficits
of profligate economies, such as the US, will narrow the surpluses
of countries that over-save (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, this will lead to a weaker recovery in global growth.
There are also now two reasons why there is a rising risk
of a double-dip W-shaped recession. 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.
In summary, the recovery is likely to be anaemic and below trend in advanced economies and there is a big risk
of a double-dip recession.
The writer is professor
of economics at the Stern School
of Business, NYU
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