Nouriel Roubini sees the global economy as a four-engine jetliner with only one operational engine — the “Anglosphere” of the U.S. and the U.K.
Even that one good engine could find itself in trouble from the effects of the other sputtering engines — the Eurozone, Japan and emerging markets — since the possibility is that “the less the U.S. will be able to decouple from the funk everywhere else, even if domestic demand seems robust.”
The reason, writes the NYU professor and chairman of Roubini Global Economics on Project Syndicate, is that “weakness in the rest of the world implies a stronger dollar, which will invariably weaken U.S. growth.”
More bad news is likely if weakness in the other three engines deepens while the dollar rises and if the Federal Reserve does not wait to raise rates “until the global economic weather clears.”
Writing just before the midterm elections in the U.S., Roubini also worries that Republican control of the Senate would mean more gridlock in Washington, which would “prevent the passage of important structural reforms that the U.S. needs to boost growth.”
As for the markets, he notes the growth in volatility and declares that “a correction is still underway,” and that some recent bad macro news — which can be good for markets — is, in the present case, bad for the markets, because of the perception of policy inertia.
Oil prices are low due to increased production, especially in the U.S., but also due to slowing demand from Europe and emerging markets. And while cheaper oil is good news for manufacturers and households, cheaper prices “hurt energy exporters and their spending,” and their persistence could “induce a fall in investment in new capacity, further undermining global demand.”
Roubini recites a long list of trouble for the global economy: slowing growth in emerging markets and Europe being “one shock away from outright deflation and another bout of recession.”
The Japanese engine, he says, “is running out of fuel after a year of fiscal and monetary stimulus.” Prodded by a 7.1% annualized decline in GDP in 2014’s second quarter, the Bank of Japan decided last week to initiate in 2015 a major round of quantitative easing of its own, increasing its balance sheet by 15% of GDP per annum and extending the average duration of its bond purchases from seven years to 10 years. The stock markets in Japan and the U.S. rose in response, but the yen fell sharply against the dollar.
So, Roubini asks, can the global economy “remain aloft on a single engine?” U.S. growth, he answers, can “provide sufficient global lift — at least for now.” But he sees serious storms ahead, starting with the still-high level of public and private debt in developed economies and rising income inequality, two trends that he writes “may be the source of the secular stagnation that is making structural reforms more politically difficult to implement.”
He worries, too, about the “rise of nationalistic, populist and nativist parties in Europe, North America and Asia,” though he is glad that geopolitical and geo-economic risks “have not yet led to financial contagion.”
However, those risks — everything from strife in the Middle East and Hong Kong political instability to Ebola and climate warming — are slowing down both capital spending and consumption.
Sticking with his theme, Roubini concludes that the “pilots” of the single-engine global economy “must navigate menacing storm clouds, and fights are breaking out among the passengers. If only there were emergency crews on the ground.”