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Nouriel Roubini
Published: Monday 21 January 2013
As 2013 begins, the downside risks to the global economy are gathering force.

The Economic Fundamentals of 2013

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The global economy this year will exhibit some similarities with the conditions that prevailed in 2012. No surprise there: we face another year in which global growth will average about 3%, but with a multi-speed recovery – a sub-par, below-trend annual rate of 1% in the advanced economies, and close-to-trend rates of 5% in emerging markets. But there will be some important differences as well.

Painful deleveraging – less spending and more saving to reduce debt and leverage – remains ongoing in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop most advanced economies this year, rather than just the eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment in most advanced economies, another year of mediocre growth could give way to outright contraction in some countries.

With growth anemic in most advanced economies, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Most major advanced economies’ central banks – the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank – have engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan, which is being pushed toward more unconventional policies by Prime Minister Shinzo Abe’s new government.

Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag – about 1.4% of GDP – on an economy that has grown at barely a 2% rate over the last few quarters.

Second, while the ECB’s actions have reduced tail risks in the eurozone – a Greek exit and/or loss of market access for Italy and Spain – the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year.

After all, stagnation and outright recession – exacerbated by front-loaded fiscal austerity, a strong euro, and an ongoing credit crunch – remain Europe’s norm. As a result, large – and potentially unsustainable – stocks of private and public debt remain. Moreover, given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits.

Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption. By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate. And, because the country’s new leadership – which is conservative, gradualist, and consensus-driven – is unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate. So the risk of a hard landing will rise by the end of this year.

Fourth, many emerging markets – including the BRICs (Brazil, Russia, India, and China), but also many others – are now experiencing decelerating growth. Their “state capitalism” – a large role for state-owned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment – is the heart of the problem. Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen.

Finally, serious geopolitical risks loom large. The entire greater Middle East – from the Maghreb to Afghanistan and Pakistan – is socially, economically, and politically unstable. Indeed, the Arab Spring is turning into an Arab Winter. While an outright military conflict between Israel and the US on one side and Iran on the other side remains unlikely, it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons. With Israel refusing to accept a nuclear-armed Iran, and its patience wearing thin, the drums of actual war will beat harder. The fear premium in oil markets may significantly rise and increase oil prices by 20%, leading to negative growth effects in the US, Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers.

While the chance of a perfect storm – with all of these risks materializing in their most virulent form – is low, any one of them alone would be enough to stall the global economy and tip it into recession. And while they may not all emerge in the most extreme way, each is or will be appearing in some form. As 2013 begins, the downside risks to the global economy are gathering force.

Follow Project Syndicate on Facebook or Twitter. For more from Nouriel Roubini, click here.

ABOUT Nouriel Roubini


Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at the Stern School of Business, New York University, and co-author of the book Crisis Economics.

Amazing.We have ever

Amazing.We have ever decreasing resources and continue to measure progress by the way we deplete them with ever increasing efficiency.Expecting growth every year is how we got to where we are dumb are we?

Mr Roubini seems to have

Mr Roubini seems to have never heard of climate change or ecological collapse. Growth is dead in the west except for funny money bubbles designed to benefit the 1%. And after the killer smog in China last week, if one actually adds up the real numbers in China, all of their growth is going to pay for healing after their pollution and climate disasters.,

It's time (long past time if

It's time (long past time if you ask me) to start "deleveraging" into a sustainable economy. And I'm not talking about "sustainable growth". Growth is the problem, not the solution to our economic woes.

What's wrong with the notion that we can all live perfectly happy lives with enough to eat, a roof over our heads, adequate clothing, education and healthcare - and everyone has it and that's all anyone has?

If people learned the Old Ways - enjoying each other, enjoying community, enjoying singing, dancing, making music, etc without high priced professional entertainers, for instance - we'd be a much happier people.

A return to simplicity is our best hope to continue the species. It's not really just an option for us tree huggers anymore. It's our specie's survival on the line.

I appreciated MountainMan23's

I appreciated MountainMan23's perspective, because I do my best to live as he suggests and because his last sentence gets at the larger truth of the matter. I regret that for the vast majority, the inevitable collapse (over a period of decades) of the unsustainable present course will entail a lot of deprivation, war, suffering and premature death.

The author of this article gives us a bland overview of global economics as the global wealthy elite see it. The masses must be kept striving for growth, and the myth it can be sustained must be perpetuated. There will be subordinate winners and losers, but in all events the wealthy elite will accumulate more wealth and power and the non-elite will be herded along to socio-economic slaughter.

The wealthy elite now in control worldwide have brainwashed the vast majority to a degree that is mind-boggling. These global predators are increasing their wealth and power as we speak, and they will volunteer nothing nor any course change for the sake of the masses. Indeed, they rationalize what they do, such that few experience guilt or see themselves as greedy. When the day comes that desperate masses storm their castles, they might throw out some crusts of stale bread, but when that fails to appease, they will have no qualms about calling on their police state to disperse, imprison and kill those who threaten their wealth and power.

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