The latest macroeconomic news from the US, other advanced economies and emerging markets confirms that the global economy will face a severe recession next year. In the US, recession started last December, and will last at least until next December — the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5 percent.
The recession in other advanced economies (the euro zone, the UK, the EU, Canada, Japan, Australia and New Zealand) started in the second quarter of this year, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more severe since then.
There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices and capital flight take their toll on growth.
Indeed, the world should expect a near recession in Russia and Brazil next year, owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries.
Other emerging markets in Asia, Africa, Latin America and Europe will not fare better, and some may experience full-fledged financial crises. More than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey and Ukraine in Europe; Indonesia, South Korea and Pakistan in Asia; and Argentina, Ecuador and Venezuela in Latin America.
Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions — including the IMF — provide enough lending to cover their external financing needs.
With a global recession a near certainty, deflation — rather than inflation — will become the main concern for policymakers. The fall in aggregate demand while potential aggregate supply has been rising because of overinvestment by China and other emerging markets will sharply reduce inflation. Slack labor markets with rising unemployment rates will cap wage and labor costs.
Further falls in commodity prices — already down 30 percent from their summer peak — will add to these deflationary pressures.
Policymakers will have to worry about a strange beast called “stag-deflation” (a combination of economic stagnation, recession and deflation); about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness); and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions and governments).
With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary. And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important.
In the process, the role of states and governments in economic activity will be vastly expanded.
Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. As banks curtail lending to each other, to other financial institutions and to the corporate sector, central banks are becoming the only lenders around.
Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households.
The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.
Nevertheless, in the short run, very aggressive monetary and fiscal policy actions — both traditional and non-traditional — must be undertaken to ensure that the inevitable stag-deflation of next year does not persist into 2010 and beyond.
So far, the US response appears to be more aggressive than that of the euro zone as the European Central Bank falls behind the curve on interest rates and the EU’s fiscal stance remains weak.
Given the severity of this economic and financial crisis, financial markets will not mend for a while. The downside risks to the prices of a wide variety of risky assets (equities, corporate bonds, commodities, housing and emerging-market asset classes) will remain until there are true signs — toward the end of next year — that the global economy may recover in 2010.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor, an economic consultancy.
COPYRIGHT: PROJECT SYNDICATE
Concerns that the US might abandon Taiwan are often overstated. While US President Donald Trump’s handling of Ukraine raised unease in Taiwan, it is crucial to recognize that Taiwan is not Ukraine. Under Trump, the US views Ukraine largely as a European problem, whereas the Indo-Pacific region remains its primary geopolitical focus. Taipei holds immense strategic value for Washington and is unlikely to be treated as a bargaining chip in US-China relations. Trump’s vision of “making America great again” would be directly undermined by any move to abandon Taiwan. Despite the rhetoric of “America First,” the Trump administration understands the necessity of
US President Donald Trump’s challenge to domestic American economic-political priorities, and abroad to the global balance of power, are not a threat to the security of Taiwan. Trump’s success can go far to contain the real threat — the Chinese Communist Party’s (CCP) surge to hegemony — while offering expanded defensive opportunities for Taiwan. In a stunning affirmation of the CCP policy of “forceful reunification,” an obscene euphemism for the invasion of Taiwan and the destruction of its democracy, on March 13, 2024, the People’s Liberation Army’s (PLA) used Chinese social media platforms to show the first-time linkage of three new
If you had a vision of the future where China did not dominate the global car industry, you can kiss those dreams goodbye. That is because US President Donald Trump’s promised 25 percent tariff on auto imports takes an ax to the only bits of the emerging electric vehicle (EV) supply chain that are not already dominated by Beijing. The biggest losers when the levies take effect this week would be Japan and South Korea. They account for one-third of the cars imported into the US, and as much as two-thirds of those imported from outside North America. (Mexico and Canada, while
I have heard people equate the government’s stance on resisting forced unification with China or the conditional reinstatement of the military court system with the rise of the Nazis before World War II. The comparison is absurd. There is no meaningful parallel between the government and Nazi Germany, nor does such a mindset exist within the general public in Taiwan. It is important to remember that the German public bore some responsibility for the horrors of the Holocaust. Post-World War II Germany’s transitional justice efforts were rooted in a national reckoning and introspection. Many Jews were sent to concentration camps not
RSS