S&P’s decision to cut its outlook for U.S. government debt from stable to negative—a historic first—sent markets tumbling: On April 18, the Dow Jones Industrial Average and the S&P 500 both recorded their biggest one-day drops in nearly a month (though U.S. Treasurys and the dollar did well). The landmark outlook downgrade reinforces what we have been saying since 2010: The United States is on an unsustainable fiscal path from which it cannot exit without political consensus. The key question is whether the gridlocked U.S. political system can respond in time to avert a bond market revolt.
Contagion has taken hold of Spain, with respect to both the sovereign and the banking system, in the wake of Ireland’s financial troubles and bailout application. In contrast with Greece, where the key vulnerabilities are in the public sector, both Spain and Ireland have run up large private sector imbalances following real estate booms and busts. In “Comparing Spain With Ireland and Other PIIGS: Better in Some Ways, More at Risk in Others,” available exclusively to clients, we shed light on Spain’s balance sheet vulnerabilities to assess liquidity and solvency risks in comparison with Ireland and the other PIIGS (Italy, Greece and Portugal).
Contagion is spreading from Ireland to Spain, which shares some key vulnerabilities in the wake of its real estate boom/bust and large non-performing loan overhang in the banking sector. A house price comparison shows that the housing bubble in Spain was more pronounced than in the United States but less pronounced than in Ireland.
An anemic and subpar U.S. recovery amid balance-sheet repair, weak demand, slack in the economy and disinflationary pressures has always been our baseline scenario. By the summer of 2010, the disinflationary bias in expectations had become more evident, and the economy—lacking a self-sustained recovery—had started heading toward a dangerous stall speed. We vocally expressed our concerns around deflation/stagnation/double-dip scenarios and called for more policy action, while recognizing that the effects on the real economy would be limited.
The curtain has opened on Act Two of our “Year of Two Halves”—RGE’s theme since the end of 2009—with the slowdown forecast for H2 2010 getting here a bit earlier than expected. Growth in Q2 2010 registered a very weak 1.6%, revised down from an original estimate of 2.4%—a sharp slowdown from the 3.7% of Q1. This implies much weaker growth in H1 than even bearish forecasters had expected. Moreover, most of the growth was driven by a temporary inventory adjustment; final sales grew a mediocre 1.1% in Q1 and 1.0% in Q2.
We’d like to be able to say we’ve been pleasantly surprised by recent data, after predicting in our Q3 Outlook Update that 2010 would be a “Year of Two Halves.” Instead, a string of releases in the past two weeks has made clear that the sluggish second half is here, after fiscal stimulus and inventory restocking fueled growth in the first six months.
Since the end of 2009 we have been emphasizing that the recovery would be multi-speed—or at least two-speed—with much of the advanced world displaying a below-trend, anemic growth pace and the emerging world showing a more V-shaped recovery. Now, the global macroeconomic deterioration that we still see emerging in the second half of 2010 increasingly is becoming the consensus view. In much of the advanced world this low growth will feel like a recession even if these economies technically avoid a double dip. Meanwhile, emerging markets are showing that even their more robust recoveries are not insulated from the slowdowns and structural adjustments in advanced economies. We have never been subscribers to the decoupling thesis and believe that emerging markets also will have to partially adjust to a “New Normal.”
Editor’s Note: A smaller version of this piece was published today by the Financial Times.
The largest financial crisis in history is morphing from private entities (the banking sector and the household sector) to sovereign entities. At best, fiscal cuts will hit the European recovery; the collapsing euro will subtract from growth in key trading partners – the U.S., UK, Japan and China. At worst, the financial system may come unhinged if the euro disintegrates or sovereign(s) default disorderly, precipitating a double-dip recession. Without an objective, 360-degree diagnosis and a resolute response, we may sink deeper or face larger crises that we clearly cannot afford.
Fortune: Renowned economist Nouriel Roubini talks about how he became a ‘dismal scientist’ and opens up about his guilty pleasure. (Click for video.)
It’s that time again—every quarter RGE provides clients with macroeconomic outlooks for the countries we cover, along with updated country-by-country GDP and CPI forecasts. Our latest outlook, examining our projections for Q2 and beyond, is hot off the presses. It includes our analysis of the growth trajectories of over 70 countries or regions, summarized in our macro forecast table, and a special section on commodity prices. The following note is drawn from the introductory essay, in which Christian Menegatti, Rachel Ziemba and Nouriel Roubini discuss global growth trends. Clients can read the full essay, which includes our precise growth forecasts for the countries discussed below and an explanation of the assumptions underpinning our projections.
This week’s newsletter is excerpted from an analysis by Nouriel Roubini: “The U.S.-China Currency and Trade Collision Course.” Dr. Roubini reflects on recent discussions with Chinese policymakers at the China Development Forum, including his suggested response to the flaring U.S.-China currency rift, as well as in-depth discussion of what might happen if the U.S. brands China a “currency manipulator.” Below is his outline of the problem.