In his op-ed in the Financial Times Nouriel Roubini, sometimes called “Doctor Doom”, points to irrational exuberance from the “economic consensus”:
There are three open questions now on the outlook. When will the global recession be over? What will be the shape of the economic recovery? Are there risks of a relapse?
On the first question it looks like the global economy will bottom out in the second half of 2009. In many advanced economies (the US, UK, Spain, Italy and other eurozone members) and some emerging market economies (mostly in Europe) the recession will not be formally over before the end of the year, as green shoots are still mixed with weeds. In some other advanced economies (Australia, Germany, France and Japan) and most emerging markets (China, India, Brazil and other parts of Asia and Latin America) the recovery has already started.
On the second issue the debate is between those – most of the economic consensus – who expect a V-shaped recovery with a rapid return to growth and those – like myself – who believe it will be U-shaped, anaemic and below trend for at least a couple of years, after a couple of quarters of rapid growth driven by the restocking of inventories and a recovery of production from near Depression levels.
He continues by pointing to seven factors that may slow growth:
- high unemployment, particularly in the United States
- the failure to deal with the crisis of insolvency in the financial sector
- the likelihood that consumption will continue to be slow in importing countries
- the weakness of the financial system
- weak profitability
- the releveraging of the public sector
- failure of countries running current account surpluses to have enough domestic consumption to spur growth
and suggests a double-dip recession may be likely.
I think that Dr. Doom may be a little optimistic. In the United States not only are jobs continuing to be shed but it hasn’t resulted in commensurate loss in production. To me, at least, that suggests that business won’t be eager to take on more employees for the foreseeable future. Indeed, the uncertainty about the business climate in the United States that our political leadership is fomenting may become the single greatest impediment to growth.
I do not where demand will come from. Remembering back to that San Fran Fed paper, it looks like it is difficult to expect consumers to go at it again until savings accumulate.
“Indeed, the uncertainty about the business climate in the United States that our political leadership is fomenting may become the single greatest impediment to growth.”
What were you thinking about here? Who do you think business will sell to?
Steve
We’re overly dependent on consumer spending—more dependent on it than at any time in our history.
We should be doing more exporting and businesses should be doing more capital investing. Government’s first priority should be to establish a stable economic environment and its second should be to negotiate with our trading partners so that they and particularly China stop playing currency games. Many of our economic problems date back to the point when China started pegging the yuan to the dollar in the early 1990’s.
Unemployment is a lagging indicator, so even when the expansion starts my guess is that unemployment will not improve and may continue to worsen. This is what we’ve seen in the last two recessions.
As for productivity, not so sure about that. We have much lower GDP–i.e. we aren’t producing the same level of output we once did, but with fewer employees. On what are you basing your conclusions?