Nouriel Roubini: ‘Can we avoid another severe recession? It might simply be mission impossible’
By Nouriel Roubini
7 August 2011 The first half of 2011 showed a slowdown of growth – if not outright contraction – in most advanced economies. Optimists said this was a temporary soft patch. This delusion has been dashed. Even before last week’s panic, the US and other advanced economies were odds-on for a second severe recession. America’s recent data have been lousy: there has been little job creation, weak growth and flat consumption and manufacturing production. Housing remains depressed. Consumer, business and investor confidence has been falling, and will now fall further. Across the Atlantic the eurozone periphery is now contracting, or barely growing at best. The risk that Italy or Spain – and perhaps both – will lose access to debt markets is now very high. Unlike Greece, Portugal and Ireland these two countries are too big to be bailed out. Meanwhile, the UK has seen flat growth as austerity bites, and structurally stagnating Japan will recover for a few quarters – after double-dipping after the earthquake – only to stagnate again as the stimulus fizzles out. Even worse, leading indicators of global manufacturing are slowing sharply – both in the emerging economies like China, India and Brazil, and export-oriented or resource-rich countries such as Germany and Australia. Until last year policymakers could always produce a new rabbit from their hat to trigger asset reflation and economic recovery. Zero policy rates, QE1, QE2, credit easing, fiscal stimulus, ring-fencing, liquidity provision to the tune of trillions of dollars and bailing out banks and financial institutions – all have been tried. But now we have run out of rabbits to reveal. The misguided decision by Standard & Poor’s to downgrade the US at a time of such severe market turmoil and economic weakness only increases the chances of a double dip and even larger fiscal deficits. Paradoxically, however, US Treasuries will probably remain the world’s least ugly safe asset: risk aversion, equity declines and a looming slump could even see treasury yields fall rather than rise. Fiscal policy is now contractionary in both the eurozone and the UK. Even in the US the issue is only the amount of drag, as state and local authorities, and now the federal government, cut spending, reduce transfer payments and (soon enough) raise taxes. Another round of bank bail-outs is politically unacceptable. But even if it were not, most countries, especially in Europe, are so distressed that their sovereign risk is actually leading to banking risk – as banks are loaded up with distressed government debt. […] So can we avoid another severe recession? It might simply be mission impossible. […]
Mission impossible: stop another recession
"Another severe recession"?
Well, inasmuch as the first "recession" never really ended, and we're obviously headed for something more profound than just another economic headache, there seems to be an unduly optimistic assumption barely buried here.