Nouriel Roubini’s Rejection of the ‘Green Shoots’ Argument

In a Forbes article written this week, Nouriel Roubini rejects the idea of “green shoots optimism” as “grossly misplaced” and offers what he calls “three noteworthy reasons” in defense of his argument.

From Forbes: [W]hile the rate of economic contraction is now lower than the free-fall and near-depression experienced by many economies in the fourth quarter of 2008 and the first of 2009, the recent optimism that “green shoots” of recovery will lead to the recession to bottom out by the middle of this year–and that recovery to potential growth will rapidly occur in 2010–appears grossly misplaced, for three noteworthy reasons.

First, the current deep and protracted U-shaped recession in the U.S. and other advanced economies will continue through all of 2009, rather than reach a trough in the middle of this year as expected by the optimists.

Second, rather than a rapid V-shaped recovery, growth will remain sluggish and sub-par for at least two years into all of 2010 and 2011. A couple of quarters of more rapid growth cannot be ruled out as we get out of this recession toward the end of the year or early next year as firms rebuild inventories and the effects of the monetary and fiscal stimulus reach a delayed peak. But structural weaknesses of the U.S. and the global economy will cause both a below-trend growth and even the risk of a reduction of potential growth itself.

Third, we cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.

For more on Roubini’s detailed explanations of these three serious risks to the U.S. and global economic outlook click here »