Fragile and unbalanced in 2012

December 15, 2011

Nouriel Roubini
The opinions expressed are his own.

The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies. Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the eurozone. And turmoil in the Middle East is causing serious economic risks – both there and elsewhere – as geopolitical risk remains high and thus high oil prices will constrain global growth.

At this point, a eurozone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness, and fiscal austerity imply a serious downturn.

The US – growing at a snail’s pace since 2010 – faces considerable downside risks from the eurozone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality, and political gridlock.

Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and eurozone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.

Meanwhile, flaws in China’s growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment, and government revenue. The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially eurozone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.

They are not alone. On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal, and financial reforms that are needed to restore sustainable and balanced growth.

Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved. But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China’s surge in manufacturing investment in recent years, these companies’ capital spending and hiring have remained muted.

Rising inequality – owing partly to job-slashing corporate restructuring – is reducing aggregate demand further, because households, poorer individuals, and labor-income earners have a higher marginal propensity to spend than corporations, richer households, and capital-income earners. Moreover, as inequality fuels popular protest around the world, social and political instability could pose an additional risk to economic performance.

At the same time, key current-account imbalances – between the US and China (and other emerging-market economies), and within the eurozone between the core and the periphery – remain large. Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

Finally, policymakers are running out of options. Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency – and thus creditworthiness – rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes, and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments don’t have the money to do so. And, politically, the promise of the G-20 has given way to the reality of the G-0: weak governments find it increasingly difficult to implement international policy coordination, as the worldviews, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances – the large debts of households, financial institutions, and governments – by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the eurozone.

Restoring robust growth is difficult enough without the ever-present specter of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces in 2012. To paraphrase Bette Davis in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy year!”


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His speciality: doom, doom, doom and a bit more…doom.

After using 857 words to restate the obvious risks, not one solution is offered. That is called playing it safe.
Try again.

Posted by FBreughel1 | Report as abusive

The title of the article is “Fragile and unbalanced in 2012″ not about how to solve that. Roubini playing it safe…he was ringing the doom and gloom bell since 2005 but nobody listened and he was right. So you may want to listen to what he says as opposed to being critical about what he says. You also may want to research him and go to his website Lots and I mean of lots of analysis and suggestions on how to avoid these economic problems but you already know…not many people take him seriously and think he is just playing it safe as you say. We were warned, given solutions it just that nobody listened or thought “this could never happen”…think again….Tick Tock…

Posted by Crash866 | Report as abusive

here is some Roubini, with detail, proposed solutions, and the way forward………

Posted by Robertla | Report as abusive

@Crash866,@Robertla: Thank you for your posts.

I stand corrected. Man is bound to make mistakes and in this case, I made one towards professor Roubini. Thank you for pointing that out and make me wiser in the process.

Posted by FBreughel1 | Report as abusive bt-magic-story-from-devon.html

Posted by Tiu | Report as abusive

If you keep saying there will be recession for years then you are bound to be right.

Posted by Minotaur368 | Report as abusive


Posted by Arbrene-Hussain | Report as abusive

I’ll say this….He’s right on the money about our situation.

Young retirees in mid fifties. Relatively high net worth ($1mm plus). No debt. But relatively low income. Can’t make much more than a couple of percent on investments (not willing to go risk on at all).

Our income keeps falling as expenses rise. While we can cover the basics we’re forced to keep cutting our discretionary spending. It’s the only way to keep our family’s budget balanced.

I don’t see any easy solutions to this economy. That’s the frightening part.


Posted by Missinginaction | Report as abusive

I would like to offer a solution: accountability. If checks and balances of governments and businesses were enforced and employed, there would be no need for a solution or a plan. Make people as uncomfortable as possible to step off the path and most will continue straight ahead. Since government officials and businesses owners are perpetually allowed to make their deals and play their games without laws to prevent them or hold them accountable for the consequences, there will never be a solution. Believe me, I always think twice about what I choose to do because, being an average, everyday person without influence or power, I am held directly accountable. It makes a difference.

Posted by alwayslearning | Report as abusive

The man does not give any solutions to the problems .He only states the problems that every economist knows.

Posted by ektope | Report as abusive

The man does not give any solutions to the problems .He only states the problems that every economist knows.

Posted by ektope | Report as abusive

The man does not give any solutions to the problems .He only states the problems that every economist knows.

Posted by ektope | Report as abusive

@ Crash866 “….Tick Tock…” is this a peter pan/captain hook/ticking clock fetish or a cryptic economic clue?

Posted by scythe | Report as abusive

Whether you see only blue skies at all times or storms at all times you will always be proved right eventually — until the ball bounces the other way and you’re proved wrong. These guys who always, no matter what, predict the same thing are wizards of Oz. Little men behind a big curtain.

Posted by IvanG | Report as abusive

Economic growth nurtures the global economic system and is the solution to the present crisis.

OK, but what about the fact that global consumption has already far exceeded nature’s ability to recreate and that global pollution already is far greater than nature’s ability to clean up?

Political and industrial leaders as well as the vast majority of voters seem to agree unlimited growth is no problem on a planet limited in size. They obviously think the map is right and the terrain wrong when the two contradict each other.

Posted by timingbeltkill | Report as abusive

@alwayslearning — Amen to that. Accountability and transparency would get things moving quickly back onto a path in the direction towards prosperity. Right now we’re moving away from it.

Mark to market is a necessary ingredient for the proper functioning of capitalism.

Posted by AdamSmith | Report as abusive

Some comments here complain about the lack of a solution in mr. Roubini’s article. It does have some childishness, wanting somone to give an eay fix (also called Big Bazooka in certain situations), but if it really needs be, try fairy dust. The fact of the matter is that the various economic imbalances have become so ingrained in the (international) policies that we have no choice but deleverage and let markets find a sensible balance. Meaning: sit back, make the economies competitive by removing friction, give those out of luck sufficient hope and income and wait for better times.

Posted by Beethoven | Report as abusive

I look at the patched together global economy and would offer the following. I think that the global economy may never work. I think, that like a complicated machine or formula or whatever, that it has too many modes to failure. I say “Scrap the Global Economy”. Like a business with too many branches some branch will do poorly and drag down the remainder.

Posted by fred5407 | Report as abusive