Recent data suggest that the rate of contraction in the world economy may be slowing. But hopes that “green shoots” of recovery may be springing up have been dashed by plenty of yellow weeds. Recent data on employment, retail sales, industrial production and housing in the US remain very weak; Europe’s first-quarter GDP growth data are dismal; Japan’s economy is still comatose; and even China — which is recovering — has very weak exports. Thus, the consensus view that the global economy will soon bottom out has proven — once again — to be overly optimistic.
After the collapse of Lehman Brothers in September last year, the global financial system nearly melted down and the world economy went into free fall. Indeed, the rate of economic contraction in the fourth quarter of last year and the first quarter of this year reached near-depression levels.
At that point, global policymakers got religion and started to use most of the weapons in their arsenal: vast fiscal-policy easing; conventional and unconventional monetary expansion; trillions of dollars in liquidity support, recapitalization, guarantees and insurance to stem the liquidity and credit crunch; and finally massive support to emerging-market economies. In the last two months alone, one can count more than 150 different policy interventions around the world.
This policy equivalent of former US secretary of state Colin Powell’s doctrine of “overwhelming force,” together with the sharp contraction of output below final demand for goods and services (which drew down inventories of unsold goods), sets the stage for most economies to bottom out early next year.
Even so, the optimists who spoke last year of a soft landing or a mild “V-shaped” eight-month recession were proven wrong, while those who argued that this would be a longer and more severe “U-shaped” 24-month recession — the US downturn is already in its 18th month — were correct. And the recent optimism that economies will bottom out by mid-year have been dashed by the most recent economic data.
The crucial issue, however, is not when the global economy will bottom out, but whether the global recovery — whenever it comes — will be robust or weak over the medium term. One cannot rule out a couple of quarters of sharp GDP growth as the inventory cycle and the massive policy boost lead to a short-term revival. But those tentative green shoots that we hear so much about these days may well be overrun by yellow weeds even in the medium term, heralding a weak global recovery over the next two years.
First, employment is still falling sharply in the US and other economies. Indeed, in advanced economies, the unemployment rate will be above 10 percent by next year. This will be bad news for consumption and the size of bank losses.
Second, this is a crisis of solvency, not just liquidity, but true de-leveraging has not really started, because private losses and debts of households, financial institutions and even corporations are not being reduced, but rather socialized and put on government balance sheets. Lack of de-leveraging will limit the ability of banks to lend, households to spend and firms to invest.
Third, in countries running current-account deficits, consumers need to cut spending and save much more for many years. Shopped out, savings-less, and debt-burdened consumers have been hit by a wealth shock (falling home prices and stock markets), rising debt-service ratios and falling incomes and employment.
Fourth, the financial system — despite the policy backstop — is severely damaged. Most of the shadow banking system has disappeared and traditional commercial banks are saddled with trillions of dollars in expected losses on loans and securities while still being seriously undercapitalized. So the credit crunch will not ease quickly.
Fifth, weak profitability, owing to high debts and default risk, low economic — and thus revenue — growth, and persistent deflationary pressure on companies’ margins, will continue to constrain firms’ willingness to produce, hire workers and invest.
Sixth, rising government debt ratios will eventually lead to increases in real interest rates that may crowd out private spending and even lead to sovereign refinancing risk.
Seventh, monetization of fiscal deficits is not inflationary in the short run, whereas slack product and labor markets imply massive deflationary forces. But if central banks don’t find a clear exit strategy from policies that double or triple the monetary base, eventually either goods-price inflation or another dangerous asset and credit bubble (or both) will ensue. Some recent rises in the prices of equities, commodities and other risky assets is clearly liquidity-driven.
Eighth, some emerging-market economies with weaker economic fundamentals may not be able to avoid a severe financial crisis, despite massive IMF support.
Finally, the reduction of global imbalances implies that the current-account deficits of profligate economies (the US and other Anglo-Saxon countries) will narrow the current-account surpluses of over-saving countries (China and other emerging markets, Germany and Japan). But if domestic demand does not grow fast enough in surplus countries, the resulting lack of global demand relative to supply — or, equivalently, the excess of global savings relative to investment spending — will lead to a weaker recovery in global growth, with most economies growing far more slowly than their potential.
So, green shoots of stabilization may be replaced by yellow weeds of stagnation if several medium-term factors constrain the global economy’s ability to return to sustained growth. Unless these structural weaknesses are resolved, the global economy may grow in from next year to 2011, but at an anemic rate.
Nouriel Roubini is a professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor (www.rgemonitor.com)
COPYRIGHT: PROJECT SYNDICATE
In an article published in Newsweek on Monday last week, President William Lai (賴清德) challenged China to retake territories it lost to Russia in the 19th century rather than invade Taiwan. “If it is really for the sake of territorial integrity, why doesn’t China take back Russia?” Lai asked, referring to territories lost in 1858 and 1860. The territories once made up the two flanks of northern Manchuria. Once ceded to Russia, they became part of the Russian far east. Claims since then have been made that China and Russia settled the disputes in the 1990s through the 2000s and that “China
Trips to the Kenting Peninsula in Pingtung County have dredged up a lot of public debate and furor, with many complaints about how expensive and unreasonable lodging is. Some people even call it a tourist “butchering ground.” Many local business owners stake claims to beach areas by setting up parasols and driving away people who do not rent them. The managing authority for the area — Kenting National Park — has long ignored the issue. Ultimately, this has affected the willingness of domestic travelers to go there, causing tourist numbers to plummet. In 2008, Taiwan opened the door to Chinese tourists and in
Taiwan People’s Party (TPP) Chairman Ko Wen-je’s (柯文哲) arrest is a significant development. He could have become president or vice president on a shared TPP-Chinese Nationalist Party (KMT) ticket and could have stood again in 2028. If he is found guilty, there would be little chance of that, but what of his party? What about the third force in Taiwanese politics? What does this mean for the disenfranchised young people who he attracted, and what does it mean for his ambitious and ideologically fickle right-hand man, TPP caucus leader Huang Kuo-chang (黃國昌)? Ko and Huang have been appealing to that
On Tuesday, President William Lai (賴清德) met with a delegation from the Hoover Institution, a think tank based at Stanford University in California, to discuss strengthening US-Taiwan relations and enhancing peace and stability in the region. The delegation was led by James Ellis Jr, co-chair of the institution’s Taiwan in the Indo-Pacific Region project and former commander of the US Strategic Command. It also included former Australian minister for foreign affairs Marise Payne, influential US academics and other former policymakers. Think tank diplomacy is an important component of Taiwan’s efforts to maintain high-level dialogue with other nations with which it does