High possibility of another recession in the US, says economist

KUALA LUMPUR: World-renowned economics professor, Dr Nouriel Roubini, sent out warnings of a “high probability of another recession in the United States” and that the global economy could suffer a “couple of financial crises over the next 10 years”.

Roubini, who is Professor of Economics & International Business at the Stern School of Business, New York University, also said that China, the world’s fastest-growing major economy, may face “greater headwinds should there be weak growth in the United States and Europe”.

Roubini said even if the world economy didn’t slip into a double-dip, the effects would still be felt.

He added that already now the situation felt like a recession, even if we were not technically in a recession. He warned that if macro-economic figures disappointed, “we’ll see a correction in stock markets, widening interest rate spreads in credit markets, higher volatility, growing investor aversion to risk – and all that can lead to economic shock.”

He added that austerity measures to cut debt in advanced nations were hurting consumer and business confidence, and households in some of the largest economies were holding back spending.

“Emerging economies may have to get used to relying on domestic demand in a period of subdued growth for developed countries,” Roubini said.

He also said that while emerging economies could expect their recovery to be more sustainable, there was a danger of asset bubbles.

“All this slosh of liquidity is going to be chasing assets and a lot of that liquidity is going to go from advanced economies in the form of dollar funded or yen-funded carry trades,” he said.

He added that the challenge for emerging economies was to manage that inflow of hot money over the next few years.

“Emerging economies should allow currencies to gradually appreciate, impose capital controls on hot money and supervise the financial system to control excessive credit growth,” he said.

Roubini believes that current financial reforms discussed in the United States and around the world are not enough and will not prevent additional crises. He said nothing had changed, calling US reforms “too little, too late”.

“We know the second half of the year is going to be worse than the first half of the year because of the tailwinds to growth from the fiscal stimulus” turning into austerity, he said. “The main scenario is an anemic recovery, but I don’t rule out that a double-dip will occur” in the United States, he said.

An American jobless rate hovering near 10% is shaking consumer confidence and limiting spending, the biggest part of the economy.

US policy makers said recently that growth in the country was likely to be modest in the near term. US expanded at a 1.6% annual rate, the Commerce Department said last month. A US growth rate of 1% would feel like a recession, Roubini said.

“The banks in the US are already sitting on US$1 trillion in excess of reserves, (yet) they are not lending. The problems of the economy are problems of solvency, of credit, of houses, of corporates, of banks and not a problem of liquidity. I don’t believe quantitative easing is going to make much of a difference.

Roubini believes the Obama administration needs to tackle the country’s high unemployment head-on, and suggests that the Obama administration adopt payroll tax cuts for a couple of years.

“That’s a fiscal cost but where I suggest to make it revenue neutral is to make sure that the expiring tax cuts for the rich are going to be used,” he said.

“So, it’s going to be revenue neutral, it is not going to be budget busting and it’s also going to stimulate demand for labour. That’s what we need in the US economy – if you don’t have labour income, you don’t have consumption. You don’t have consumption, you don’t have economic growth.”

On the ongoing dispute between the United States and China over the yuan exchange rate, Roubini disagreed with Chinese Premier Wen Jiabao’s view that a 20% appreciation will bankrupt many companies in its export sector. “(China is a) country that has productivity growth and excess of wage growth – (it) can afford an appreciating currency without the negative effects on economic growth,” he said.