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“Fasten your seatbelts; it’s going to be a bumpy year!”

Saturday, December 31st 2011 - 18:28 UTC
Full article 12 comments
Nouriel Roubini Nouriel Roubini

By Nouriel Roubini (*) - The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies.

Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the Euro-zone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.

At this point, a Euro zone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.

The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the Euro zone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.

Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and Euro zone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.

Meanwhile, flaws in China’s growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially Euro zone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.

They are not alone. On the policy side, the US, Europe, and Japan, too have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.

Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved. But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.

Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.

At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the Euro zone between the core and the periphery – remain large. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

Finally, policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the Euro zone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”

Nouriel Roubini is chairman of Roubini Global Economics and professor at the Stern School of Business in New York University. His detailed 2012 global growth outlook is available at


Categories: Economy, International.

Top Comments

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  • Hands Off

    Everything is being held up by China (again). Once the cracks start to show there look out below. Roubini is great value.

    Dec 31st, 2011 - 08:59 pm 0
  • Forgetit87

    Thanks, Mercopress, for publishing this article.

    Dec 31st, 2011 - 11:45 pm 0
  • BJK

    Reasons for pessimism to UK .... and the Malvinas puppet people

    * The Government has embarked on savage public spending cuts that will dent demand.

    * The QE impact is unknown. It could stoke inflation, forcing rate rises to control it.

    * British house prices remain over-valued.

    * Western governments and consumers have built up colossal debts that could take more than a decade to clear. A full explanation.

    * Western economies face a demographic timebomb which could erode he wealth of nations for a generation.

    * Libor - lending rate between banks and a measure of confidence in each other - has risen more quickly in autumn 2011

    The UK had one of the worst budget deficit's in the EU in the last fiscal year, at more than 10% of GDP. It was second only to Ireland (-32.4%) and Greece (-10.5%). Basically that means the British government spent more than it earned - to the tune of £146bn, according to the OBR.

    While that overspend is being reduced, the UK's debts continue to grow.

    Britain owed £967bn in October, up from £837bn a year earlier, according to the ONS. It is likely to hit £1 trillion in 2012-13, given that economists forecast a need to borrow more than £120bn in the 2011/12 financial year.

    Read more:

    Jan 01st, 2012 - 05:28 pm 0
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