The global economy on the fly
By Nouriel Roubini
Professor of Economics at the Stern School of Business, NYU,
and Chairman of Roubini Global Economics
In the last four weeks, I have traveled to Sofia, Kuala Lumpur,
Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo,
Istanbul, and throughout the United States. As a result, the myriad
challenges facing the global economy were never far away.
In Europe, the tail risk of a eurozone break-up and a loss of
market access by Spain and Italy were reduced by last summer's
decision by the European Central Bank to backstop sovereign debt.
But the monetary union's fundamental problems - low potential
growth, ongoing recession, loss of competitiveness, and large
stocks of private and public debt - have not been resolved.
Moreover, the grand bargain between the eurozone core, the ECB, and
the periphery - painful austerity and reforms in exchange for
large-scale financial support - is now breaking down, as austerity
fatigue in the eurozone periphery runs up against bailout fatigue
in core countries like Germany and the Netherlands.
Austerity fatigue in the periphery is clearly evident from the
success of anti-establishment forces in Italy's recent election;
large street demonstrations in Spain, Portugal, and elsewhere; and
now the botched bailout of Cypriot banks, which has fueled massive
public anger. Throughout the periphery, populist parties of the
left and right are gaining ground.
Meanwhile, Germany's insistence on imposing losses on bank
creditors in Cyprus is the latest symptom of bailout fatigue in the
core. Other core eurozone members, eager to limit the risks to
their taxpayers, have similarly signaled that creditor "bail-ins"
are the way of the future.
Outside the eurozone, even the United Kingdom is struggling to
restore growth, owing to the damage caused by front-loaded
fiscal-consolidation efforts, while anti-austerity sentiment is
also mounting in Bulgaria, Romania, and Hungary.
In China, the leadership transition has occurred smoothly. But the
country's economic model remains, as former Premier Wen Jiabao
famously put it, "unstable, unbalanced, uncoordinated, and
unsustainable."
China's problems are many: regional imbalances between its coastal
regions and the interior, and between urban and rural areas; too
much savings and fixed investment, and too little private
consumption; growing income and wealth inequality; and massive
environmental degradation, with air, water , and soil pollution
jeopardizing public health and food safety.
The country's new leaders speak earnestly of deepening reforms and
rebalancing the economy, but they remain cautious, gradualist, and
conservative by inclination. Moreover, the power of vested
interests that oppose reform - state-owned enterprises, provincial
governments, and the military, for example - has yet to be broken.
As a result, the reforms needed to rebalance the economy may not
occur fast enough to prevent a hard landing when, by next year, an
investment bust materializes.
In China - and in Russia (and partly in Brazil and India) - state
capitalism has become more entrenched, which does not bode well for
growth. Overall, these four countries (the BRICs) have been
over-hyped, and other emerging economies may do better in the next
decade: Malaysia, the Philippines, and Indonesia in Asia; Chile,
Colombia, and Peru in Latin America; and Kazakhstan, Azerbaijan,
and Poland in Eastern Europe and Central Asia.
Farther East, Japan is trying a new economic experiment to stop
deflation, boost economic growth, and restore business and consumer
confidence. "Abenomics" has several components: aggressive monetary
stimulus by the Bank of Japan; a fiscal stimulus this year to jump
start demand, followed by fiscal austerity in 2014 to rein in
deficits and debt; a push to increase nominal wages to boost
domestic demand; structural reforms to deregulate the economy; and
new free-trade agreements - starting with the Trans-Pacific
Partnership - to boost trade and productivity.
But the challenges are daunting. It is not clear if deflation can
be beaten with monetary policy; excessive fiscal stimulus and
deferred austerity may make the debt unsustainable; and the
structural-reform components of Abenomics are vague. Moreover,
tensions with China over territorial claims in the East China Sea
may adversely affect trade and foreign direct investment.
Then there is the Middle East, which remains an arc of instability
from the Maghreb to Pakistan. Turkey - with a young population,
high potential growth, and a dynamic private sector - seeks to
become a major regional power. But Turkey faces many challenges of
its own. Its bid to join the European Union is currently stalled,
while the eurozone recession dampens its growth. Its
current-account deficit remains large, and monetary policy has been
confusing, as the objective of boosting competitiveness and growth
clashes with the need to control inflation and avoid excessive
credit expansion.
Moreover, while rapprochement with Israel has become more likely,
Turkey faces severe tensions with Syria and Iran, and its Islamist
ruling party must still prove that it can coexist with the
country's secular political tradition.
In this fragile global environment, has America become a beacon of
hope? The US is experiencing several positive economic trends:
housing is recovering; shale gas and oil will reduce energy costs
and boost competitiveness; job creation is improving; rising labor
costs in Asia and the advent of robotics and automation are
underpinning a manufacturing resurgence; and aggressive
quantitative easing is helping both the real economy and financial
markets.
But risks remain. Unemployment and household debt remain stubbornly
high. The fiscal drag from rising taxes and spending cuts will hit
growth, and the political system is dysfunctional, with partisan
polarization impeding compromise on the fiscal deficit,
immigration, energy policy, and other key issues that influence
potential growth.
In sum, among advanced economies, the US is in the best relative
shape, followed by Japan, where Abenomics is boosting confidence.
The eurozone and the UK remain mired in recessions made worse by
tight monetary and fiscal policies. Among emerging economies, China
could face a hard landing by late 2014 if critical structural
reforms are postponed, and the other BRICs need to turn away from
state capitalism. While other emerging markets in Asia and Latin
America are showing more dynamism than the BRICs, their strength
will not be enough to turn the global tide
Copyrights: Project Syndicate