Business & FinanceEconomics

Nouriel Roubini

Nouriel Roubini, a professor at NYU’s Stern School of Business and Chairman of Roubini Global Economics, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US… read more

Slow Growth and Short Tails

• NEW YORK – The global economy had another difficult year in 2013. The advanced economies’ below-trend growth continued, with output rising at an average annual rate of about 1%, while many emerging markets experienced a slowdown to below-trend 4.8% growth. After a year of subpar 2.9% global growth, what does 2014 hold in store for the world economy?

  The good news is that economic performance will pick up modestly in both advanced economies and emerging markets. The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%.

  Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014. The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued.

  Still, most advanced economies (the US, the eurozone, Japan, the United Kingdom, Australia, and Canada) will barely reach potential growth, or will remain below it. Households, banks, and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging. High budget deficits and public-debt burdens will force governments to continue painful fiscal adjustment. And an abundance of policy and regulatory uncertainties will keep private investment spending in check.

  The outlook for 2014 is dampened by longer-term constraints as well. Indeed, there is a looming risk of secular stagnation in many advanced economies, owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital. And the structural reforms that these economies need to boost their potential growth will be implemented too slowly.

  While the eurozone’s tail risks are lower, its fundamental problems remain unresolved: low potential growth; high unemployment; still-high and rising levels of public debt; loss of competitiveness and slow reduction of unit labor costs (which a strong euro does not help); and extremely tight credit rationing, owing to banks’ ongoing deleveraging. Meanwhile, progress toward a banking union will be slow, while no steps will be taken toward establishing a fiscal union, even as austerity fatigue and political risks in the eurozone’s periphery grow.

  In Japan, Prime Minister Shinzo Abe’s government has made significant headway in overcoming almost two decades of deflation, thanks to monetary easing and fiscal expansion. The main uncertainties stem from the coming increase in the consumption tax and slow implementation of the third “arrow” of “Abenomics,” namely structural reforms and trade liberalization.

  In the US, economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the “reshoring” of manufacturing. The downside risks result from political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties.

  Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. Moreover, several major emerging economies were hit hard in the spring and summer, after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflow.

  Emerging economies will grow faster in 2014 – closer to 5% year on year – for several reasons. Brisker recovery in advanced economies will boost imports from emerging markets. The Fed’s exit from QE will be slow, keeping interest rates low. Policy reforms in China will attenuate the risk of a hard landing. And, with many emerging markets still urbanizing and industrializing, their rising middle classes will consume more goods and services.

  Still, some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks.

  The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the Gulf oil-exporting countries.

  Finally, China will maintain an annual growth rate above 7% in 2014. But, despite the reforms set out by the Third Plenum of the Communist Party’s Central Committee, the shift in China’s growth model from fixed investment toward private consumption will occur too slowly. Many vested interests, including local governments and state-owned enterprises, are resisting change; a huge volume of private and public debt will go sour; and the country’s leadership is divided on how quickly reforms should be implemented. So, while China will avoid a hard landing in 2014, its medium-term prospects remain worrisome.

  In sum, the global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anemic in most advanced economies, and emerging-market fragility – including China’s uncertain efforts at economic rebalancing – could become a drag on global growth in subsequent years.

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  JAN 6, 2014 ..some comments:

  Absolutely amazing and pretty interesting to read regarding global economy, pretty great analysis by Dr. Roubini pure genius agree the global economy had difficult year in 2013.
  
  Margaret Brennan CBS news expert in global economy, mentioned last year was not good for global economy, probably for united states and European economy. United stated grew slower than expected which is big worry for global economy US still big growth engine for global economy.
  
  We seen some many ups-down in US economy in starting of 2013,we faced major shut down which hurt economy nearly $24 billion, despite of shut down, and fed continue stimulate economy with lower rate and $85 billion bond purchasing program, result we seen some string sign in economic indicator like strong job data, housing data, manufacturing and industries data, lower inflation and strong GDP data which suggest economy doing well, its continue to pick peace up to nearly 3 or 3.5% annual growth which positive for US and global economy. Hope we get long term, budget deal and increase dent ceiling as well as reduce deficit it will help to boost economy. Weaker European economy will also make a big impact on US-European business trade.
  
  Another big economy you can say growth engine of global economy, now looking like china little survive to get back in track to get 10% growth, which we were seen few years ago, but higher inflation, failed to reform policies, higher interest rate make investor away from investment in china, property bubble made another worry factor for china, now we seen major effect of hard landing which hurt economy as well as less demand of Chinese good in Europe and US due to weaker demand and economy, also hurt manufacturing sector, china economy is get good grip on domestic economy which help to maintain growth about 7.5%, but we seen recovery in 2014 will help to recover china, need to reform policy, soft landing and keep positive environment for investment.
  
  Also mentioned Japan economy also doing well after my Abbey took office shot his three arrow, and pumps billions of money to stimulus economy, means break the cycle of deflation and bring inflation also raise sale tax and other tax to make company run on profit also lower yen value help Japan for export and sell cheaper products in global market.GDP data also suggest positive sign and economy grow nearly 2% to 2.5% in 2014,
  
  European economy also show some growth though European austerity measure tough but countries like Italy, Spain, Ireland, Hungry continue to cut public dent to severe public sector jobs, pensions, benefits and raise taxes that hurts economy more, while we seen unemployment record level in Europe nearly 12%,mostly young people, and still banking sector feel pressure after ECB announce easy loan for banks, credit cycle still weak and demand also low put impact on financial cycle as well as credit cycle.
  
  We also seen emerging economy also feeling pain in 2013, most economy not doing well due to impact of US economy growing stronger as well fed exit policy pull investment and restore in US again due to higher profit, many emerging economy feel inflation pressure as well as lower currencies issue make economy in worse condition, but hopefully 2014 become good year for global economy.

  Reply

  An unusually optimistic presentation from Dr. Roubini, but it bodes well with the currency of positivism that we see all around.
  
  But the reference to the 'drag on global growth' need not be restricted to China's efforts on economic rebalancing; there are many examples of drag outside of China. First of all so far only monetary efforts have fructified into positive results, the fiscal efforts have been rather disappointing as investments in physical & human capital have been only left to the private sector with the government playing a role of a fence-sitter. The second is that the issue of Right of Way, as rightly pointed out by Roubini himself in an earlier post, has been left unattended, thus impeding all efforts to provide impetus to the infrastructure related investments in the Western World.
  
  The fragility of some of the emerging market economies in 2014, would be crucial to watch. Who knows this could make a world of difference .

  Two takeaways from Mr Roubini's prognostication (unusually optimistic for Dr Doom!) are the impact of rising interest rates and rebalancing in China.
  
  Rising interest rates will create growth-inhibiting stress in the lower halves of economies in both the Euro zone and the Emerging World. The need for structural reform will come sooner than these countries suppose and with bigger costs to be associated with no action.
  
  With regard to China rebalancing, this may be the biggest wild card in the world economy. If it goes wrong, you get something like the 1997-98 Asian crisis all inside one country. So if the China forecast jumps the rails, then all the other forecasts become essentially useless. Not a country in the world would not feel the negative impact.