RTTNews - There is a rising risk of a double-dip W-shaped recession for the global economy, Nouriel Roubini, the New York University economic professor who predicted the financial crisis, wrote in an opinion piece in the Financial Times on Sunday.
The global economy is starting to bottom out from the worst recession and financial crisis since the Great Depression, Roubini wrote.
The professor stated that in many advanced economies, such as the U.S., UK, Spain, Italy and other Eurozone members and some emerging European economies, the recession will not be formally over before the end of this year, as green shoots are still mixed with weeds.
In some other advanced economies like Australia, Germany, France and Japan and most emerging markets like China, India, Brazil and other parts of Asia and Latin America, the recovery has already started.
According to Roubini, the rate at which most advanced economies were contracting in the fourth quarter of 2008 and first quarter of 2009 was similar to the gross domestic product free-fall in the early stage of the Depression.
Roubini, one of the economists who expects a U-shaped world economic recovery, said there are several arguments supporting his prediction for a weak U-shaped recovery. Pointing out the sharply falling number of employed in the U.S and elsewhere, he said the jobless rate would go above 10% by 2010 in advanced economies.
This is bad news for demand and bank losses, but also for workers' skills, a key factor behind long-term labor productivity growth.
Credit squeeze, sluggish demand, weak profitability, large fiscal deficits and imbalance between countries having current account surpluses and those having deficits support his view for a weak global recovery, he said.
Further, Roubini said there are two reasons to explain why there is a rising risk of a double-dip W-shaped recession. First, there are risks associated with exit strategies from the massive monetary and fiscal easing. If policymakers take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation, means recession and deflation, he wrote.
If they maintain large budget deficits, bond market vigilantes will punish policymakers, Roubini wrote. Then, inflationary expectations will increase, long-term government bond yields would rise and borrowing rates will go up sharply, leading to stagflation, he said.
Another reason to fear a double-dip recession is that oil, energy and food prices are now rising faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand, Roubini said.
Last year, oil at $145 a barrel was a tipping point for the global economy, as it created negative terms of trade and a disposable income shock for oil importing economies. The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly towards $100 a barrel, the professor said.
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