Nouriel Roubini's Global EconoMonitor

The Global Economy on the Fly

In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States. As a result, the myriad challenges facing the global economy were never far away.


In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by last summer’s decision by the European Central Bank to backstop sovereign debt. But the monetary union’s fundamental problems – low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt – have not been resolved.

Moreover, the grand bargain between the eurozone core, the ECB, and the periphery – painful austerity and reforms in exchange for large-scale financial support – is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands.

Austerity fatigue in the periphery is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground.

Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future.

Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary.

In China, the leadership transition has occurred smoothly. But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable.”

China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety.

The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination. Moreover, the power of vested interests that oppose reform – state-owned enterprises, provincial governments, and the military, for example – has yet to be broken. As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes.

In China – and in Russia (and partly in Brazil and India) – state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been over-hyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia.

Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. “Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements – starting with the Trans-Pacific Partnership – to boost trade and productivity.

But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment.

Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. Turkey – with a young population, high potential growth, and a dynamic private sector – seeks to become a major regional power. But Turkey faces many challenges of its own. Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion.

Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition.

In this fragile global environment, has America become a beacon of hope? The US is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets.

But risks remain. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.

In sum, among advanced economies, the US is in the best relative shape, followed by Japan, where Abenomics is boosting confidence. The eurozone and the UK remain mired in recessions made worse by tight monetary and fiscal policies. Among emerging economies, China could face a hard landing by late 2014 if critical structural reforms are postponed, and the other BRICs need to turn away from state capitalism. While other emerging markets in Asia and Latin America are showing more dynamism than the BRICs, their strength will not be enough to turn the global tide.

This piece is cross-posted from Project Syndicate with permission.

18 Responses to “The Global Economy on the Fly”

jack strawApril 2nd, 2013 at 12:54 am

"USA as consumer of last resort" going on 30…is it 40 years now? maybe even 60. i really have a hard time seeing the pricing power with the collapse of the USA. "a tale of two Governments" as some have really jumped out into the hammer lane of "Big Government all the way" while others are moving forward with at least a modicum of budgetary sense. at some point those interest rate differentials in Europe will be imported into the USA. the euro dropping from 130 to 80 in a weekend would probably wake a few people up.

Robert PattersonApril 2nd, 2013 at 7:58 am

I have the sense that it is entirely possible that the US will suffer a second serious economic shock, as a confluence of continuing problems in the banking sector and certain areas of real estate, along with those created by the various tactics of the 'bailout' come together to overwash all the good news emenating from the media and business community. Just as 1933 was a sort of 'second collapse', compared to 1929-30, and dashed the nacent hopes of many, such may be the case with 2014-15. Have the huge problems of extreme abundance of vacant or extremely undervalued real estate and the gigantic overhanging debt of the banking sector been truly addressed? I think not.

Joe MellonApril 2nd, 2013 at 8:40 am

> ***even*** the United Kingdom is struggling to restore growth

There are some big assumptions in that statement that:
– the UK is a fundamentally sound economy
– the policies being followed are basically correct

Neither is correct.

A) After years of deliberately dismantling the productive economy the UK has nothing to produce or export except some services, principally financial.
These services have been shown to be of little real value.

B) The economy has flat-lined for 4 years because demand has been drastically reduced by government policy. Government debt has ballooned.

C) UK public and private debt id 500% of GDP: it cannot be repaid. So the BoE is attempting a massive inflation and is printing money like there is no tomoorrow (a not unreasonable assumption)

eugenìo occorsioApril 2nd, 2013 at 11:23 am

Nouriel, as far as I can understand from my point of view, which as you know is that of a journalist and not an economist, Cyprus is a story by its own, absolutely peculiar. The bailout, or bailin name it as you want, has to be paid by banks because the crisis is an all-banking issue, determined by the ipetrophic growth of the banking system in a small economy. The story of Italy is totally different, is a long story of expenses financed by the State, also known as citizens, and unfortunately is by citizens that it will be paid. Hoping that they (the citizens) will stand it. The dilemma which affect Germany is simple: must the citizens of other countries pay as well?

laarsApril 2nd, 2013 at 10:48 pm

EU austerity is missing the magic growth ingredient: Lower taxes, not the increases they dump on the heads of the business/citizen population. Cut govt spending and business regulation, lower taxes = recovery.

eebApril 3rd, 2013 at 2:44 am

I have just seen the new Weiss bank ratings, and several mega- banks in the Eurozone, including the 2.5 trillion- dollar (2+ trillion- Euro) Credit Agricole, have been given E- ratings (on the brink of failure). I should note that the Weiss rating system has been proven to be superior to all others over the last decade and a half. Also, almost all E- rated banks (by the Weiss system) indeed wind up failing within 6- 12 months of achieving the E- rating. Certainly, given the enormous amount of leverage in the world financial system, the crash of Credit Agricole could do for the world economy what the crash of the Credit Anstalt did in 1931. I say, clear the decks and let's bring it on!!!

TomApril 3rd, 2013 at 5:27 am

A pretty good survey. I'm more positive on Turkey and less negative on China. Global trade is in pretty decent shape despite the Europe crisis, with emerging markets accounting for most of the trade growth and the US continuing to boost imports overall while taking less oil.

I'm much more negative on the US. When stock markets are ramping while personal savings are at 2%, risks are escalating. Loose monetary policy is not boosting investment enough to make a truly visible difference – this winter's numbers were not really better than the previous winter's, they were just better than last summer's and that's been the pattern for three years now. Wait till you see a strong summer to declare improvement. At the same time, low interest rates are a way of pulling investment spending forward, which over the longer run will worsen the low-savings, low-business-investment stagnation that the US has been in since the late 1990s. The supposed revival of housing is also very dubious. There is a recovery of household formation, and strong demand for rental apartments, which is boosting construction. But the surges in single family home prices in some areas and the large amount of investor buying despite very weak real demand is not a healthy phenomenon. I'm afraid the bubble taught Americans the wrong lessons: that boosting home prices is the way to boost the economy, by decreasing savings. Where's the productivity? That is always the bottom line. Oil and shale, yes, robotics, not really so much – overall, looking soft.

LouApril 3rd, 2013 at 8:09 am

This article, and every comment thus far, ignores the geopolitical side of the equation. The U.S. is getting a pass because it has the world's largest military and is aggressive and mad enough to use it in all the wrong ways. Nobody wants to see what will happen if the wheels come of the U.S. economy. And the dollar is still the major reserve currency – yet another reason that the U.S.' creditors are not cutting bait and moving on. Fundamentals may matter in the very long term, but no one can say exactly when that will be, and analyses based on those criteria are not going to cut it.

Sudipto RoyApril 10th, 2013 at 4:23 pm

My take away is very simple. Whether it is a gloabl, local, or a geo-political problem; each is a major problem with no resolution even in the distant sight. Correspondigly, any positives for each category is of miniscual value even in the most optimistic sense – rather it is a feel good factor or more of a denial. The destiny is very clear – a major crash, soon. US elections has merely deferred the crisis. Due to lack of options, investor is blindly investing – even more reason for a sudden and a major crash. A patient on death bed cannot be saved without proper treatment – there is no tangible treatment or rather too late to treat. Cash is king is the wisdom.

ChrisMay 1st, 2013 at 6:01 am

What is cash? How safe is cash in a bail-in situation? Is cash really cash under the mattress?

RAKESH KUMARApril 11th, 2013 at 11:11 am

the problem is same through out the world. the countries who had been having surplus in the pre-crisis era they have succeded in whethering the storm sweeping the globe. China is an exception which has bulit up large reserves is not feared from the crisis. the peole in china are working and survivivng. In India there is a melt down of currency as on sustained baisis it has not created means to accumulate foreign exchange. the foreign investment is choppy.

EU CitizensApril 12th, 2013 at 7:29 pm

Two decades after the Maastricht Treaty, a COMPLETELY NOVEL EU TREATY is mandatory – not a mere set of "positive" , incremental amendments -, so as to avoid a sad situation, in the near future, where the foreseen "European common home" becomes replaced by a true "European house of correction", not compatible with essential democratic principles. We need to build a true, democratic European Union through a cooperative European disunion, where the Euro survives as a "common", parallel currency – including for the UK and the other "non-Euro states" – but no longer as the "single currency" for a fraction of the EU (currently 17 out of 27 member states)

[… ]

” – The Euro should be a COMMON currency within the future EU – including the EU27 members outside the current ‘Euro Area’ – but not necessarily the SINGLE currency.
– In this context, the coexistence of TWO parallel currencies should be allowed in each EU member state (under certain conditions, established in a novel European Treaty), within the framework of an appropriate “Cooperative European Disunion” .
– Besides the “Common Euro”, the complementary currency in each member state could be either a “national currency” (…) or a completely new currency, shared by that member state and some other “compatible” EU member states, taking into account both the relevant macroeconomic issues and appropriate geographic, historic and cultural issues."

BWildsApril 14th, 2013 at 1:22 pm

I'm very glad to see a new post by Nouriel Roubini, to the long list of negitives I don't remember seeing anything about the flaring tensions on the Korean peninsula, this most likely gained most of its heat after he wrote his article. While I agree on most all of his assessments I find myself less enthusiastic about what is happening in my part of America.

As a owner of property last month I lost a major tenant as a business closed its doors after twelve years and received notice that another was cutting back and dropping the lower floor office space. I find the economy to be more hype then substance as recent numbers confirm. What will happen when the momentum ends? My blog site has several post from my perspective in the Midwest.

bank bailoutsMay 11th, 2013 at 4:45 am

International business is in fairly reasonable form despite the despite of crisis in the Eurozone, with growing marketplaces for most of the business development and the US ongoing to increase imports overall while taking less oil.

Lloyd takubaJune 7th, 2013 at 4:07 pm

A new innovative Alternative to Quantitative Easing by the US Federal Reserve , Bank of England and Bank of Japan is for the 74 Major Global Banks who own the CLS Bank Group to divert 0.1% of the US $ 5 trillion that is traded on Global Foreign Currency Exchange Market each day , and use this money ( up to US$1 trillion a year) to boost the financial reserves of the World Bank and the International Monetary Fund via a Global Forex Trading Alternative Fund (GFTAF) concept.
The simple problem with Quantitative Easing is that it debases the currency and punishes savers and pensioners in the long term.
If the 74 global banks who own the CLS Bank diverted 0.1 % of the $ 5 trillion a day , from the Forex trading markets , this money can be used to provide the US $ 1.7 trillion needed in India and US$ 1 trillion needed in Africa( according to the World Bank) over the next ten years to fund Infrastructure Development Programs.
This money can be used to bolster the Financial Reserves of the International Monetary Fund to provide balance of payments support to countries like India in the long term.
The 2.3 billion people in India and Africa combined will become an important export market for manufactured goods from the United States , China and Europe in ten years time.
The GFTAF can replace all Western Financial Development Aid to India and Africa.
The voting shares to determine the distribution of the $ 1 trillion a year GFTAF can be determined via an Internet based Voting System , moderated by the United Nations.
To support employment in the United States and Europe , a computer program similar to the US Diversity Visa system can hand out 10,000 annual grants of US $ 100,000 to people who own small businesses to visit India and Africa and try improve a similar small business there.
This is a summary of how the Economic Crisis in the World can end within 10 years.
Kind Regards
Lloyd S Takuba
Technology Consultant
Cape Town
South Africa