Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note: How the Other Half Looks

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.”

The latest U.S. GDP data, which we examine in this Critical Issue, show that U.S. consumers have yet to start buying in earnest as personal income and employment improvement remains meager. Revisions to growth estimates for previous quarters confirm our suspicions that the consumer spending figures were too good to be true: Real consumption expenditures in the second quarter slowed to an annualized pace of 1.6% quarter-on-quarter, from 1.9% in the first quarter. After the personal savings rate swelled to 7.2% in the second quarter of 2009, it remains elevated as consumers undergo what we expect to be a multi-year deleveraging process. According to advance estimates from the U.S. Bureau of Economic Analysis, discussed in a recent RGE Analysis, GDP growth slowed to a seasonally adjusted annual rate of 2.4% quarter-on-quarter in the second quarter of 2010.

Meanwhile, leading indicators and surveys of global manufacturing suggest activity expansion eased in the second quarter as industrial production growth in the U.S. and Asia showed signs of losing steam. The JP Morgan/Markit global PMI slowed further in July, to 54.3 from 55.0 in June, marking the lowest pace of expansion this year. The industrial production slowdown has been particularly marked in Asia, and one of China’s PMIs suggested the sector’s output had contracted in July.

Though some emerging markets, like Brazil, India and Turkey, have exhibited resilient domestic demand, others, like much of emerging Asia, appear more vulnerable to an impending fall in exports. China’s growth trajectory flattened somewhat in the second quarter, with GDP expansion in the first half easing to 11.1% from the first quarter’s rate of 11.9%. In real terms, consumption’s contribution is easing, implying that efforts to rebalance China’s growth remain very limited. Though a low base distorted Mexico’s industrial production results for May, the June trade figures indicate export growth already is fading, and domestic demand improvement remains tentative. We’ve been following these dynamics closely in our LatAm Focus reports.

These signs point to the fact that the global adjustment process has been delayed. To support growth and income generation, the over-saving investment- and export-driven nations—China, emerging Asia, Germany, Japan—continue to look to the overspending countries that followed an Anglo-Saxon model of growth based on asset and credit bubbles. There is a risk of a weak recovery of global aggregate demand relative to an oversupply of production, which could contribute to deflationary pressures. As such, the recovery will continue to be multi-speed and rocky, exit strategies will remain uncoordinated and the risk of policy gridlock is high.

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5 Responses to “RGE’s Wednesday Note: How the Other Half Looks”

hAugust 5th, 2010 at 6:21 pm

“There is a risk of a weak recovery of global aggregate demand relative to an oversupply of production, which could contribute to deflationary pressures.”As long as CD Rates are low, I will do my best to not spend my hard earned money. When the fed decides to treat me with respect I will spend!

Modern Money MechanicsAugust 5th, 2010 at 10:33 pm

Inception Letter:Dear FOMC Members,As you know, due to President Obama’s recent epiphany from a dream, all US Treasuries have been declared to be cash.Unfortunately, given the liquid nature of Treasuries, the conversion process has not been disruptive to general markets nor changed the overall (M3) money supply.Also, the loan-to-cash conversion process has removed the income stream for the Federal Reserve and we will no longer be needing the services of the FOMC. Thank you so much for your tireless efforts over the years.In the future, the Federal Reserve plans to assist, in whatever way it can, management the surplus resulting from the 23% of the federal budget that formerly went to paying interest on the national debt.Warmest Regards,Ben Bernanke

sAugust 9th, 2010 at 2:32 am

“There is a risk of a weak recovery of global aggregate demand relative to an oversupply of production, which could contribute to deflationary pressures.”And is it so that because they superstimulate we have to go on to superspend?No, I would say, we have a brain and it says that all this superspending brings us nothing but superproblems.Find someone else to dump those unwanted products, Bernanke, for example the military-industrial complex that has an insatiable appetite for all these wasting and destructive initiatives. Pity the country that will be the victim of their next “heroic accomplishments”.

sAugust 11th, 2010 at 1:53 am

Much like the classics “divide et impera” (divide and rule) and the third dog running away with the bone while two (dumb) others are fighting for it. These tricks still seem to work…Somehow, people have to realize how they are steered into partizan quarreling while the manipulating third man takes it all…