Nouriel Roubini’s column in the Financial Times discussing the possibility of a double dip recession has gotten a lot of play in the last twenty-four hours. I finally got around to reading it and it is pretty underwhelming.
I say that not to disparage the column, for I thought it was well written as usual, and for Roubini pretty balanced. He doesn’t seem to be throwing out any thunderbolts and I didn’t read a whole lot of conviction on his part in the likelihood of a “W-shaped” recovery.
He notes that economies are improving around the world and then throws out the usual suspects that stand in the way of recovery:
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.
Roubini doesn’t seem to think that the threats from these are sufficient to snuff out the recovery and relies instead on two other outliers.
One is the potential for government actions to precipitate another dip. He sees this occurring either by withdrawing stimulus too soon or using it so much that it pushes interest rates up to stagflation levels. The other threat is that rising oil, energy and food prices will send another shock through economies.
The argument that government could cause us to fall back into recession is not a new one and has been thoroughly discussed. Personally, I don’t think that the risk of withdrawing stimulus too soon is all that great. It just isn’t going to happen, politicians being politicians. If they hold on too long it could lead to higher rates but I think of that as a longer-term problem. Too many prognostications about QE and the other tools the central banks are using to fight the recession have proven to be wrong.
I do think he’s spot on when it comes to commodity prices. I have maintained for some time (previous post here) that the tremendous spike up in oil prices last summer had a lot more to do with the severity of this recession than has been acknowledged. Another one, even if it were only to $100 a barrel, would devastate recoveries around the globe. Whether that’s in the cards, I don’t know, I don’t feel comfortable saying it’s not possible given the recent performance of crude.
I think most economies can climb the “Wall of Worry” that Roubini lists in his seven points. I also think they can fumble and stumble through fiscal stimulus without blowing up the world. I don’t think they can control energy prices and if they take off we are in for that “W” for sure.