Nouriel Roubini | Jul 16, 2009
“It has been widely reported today that I have stated that the recession
will be over 'this year' and that I have 'improved' my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context.
“I have said on numerous occasions that the recession would last roughly
24 months. Therefore, we are 19 months into that recession. If, as I predicted, the recession is over by the end of the year,
it will have lasted 24 months with a recovery only beginning in 2010. Simply put I am not forecasting economic growth before year’s end.
“Indeed, last year I argued that this will be a long and deep and
protracted U-shaped recession that would last 24 months. Meanwhile, the consensus argued that this would be a short and shallow
V-shaped eight-month long recession (like those in 1990-91 and 2001). That debate is over today as we are in the 19th
month of a severe recession; so the V is out the window and we are in a deep U-shaped recession. If that recession were to
be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times
longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous
two. So, there is nothing new in my remarks today about the recession being over at the end of this year.
“I have also consistently argued – including in my remarks
today - that while the consensus is that the U.S. economy will go back close to potential growth by next year, I see instead
a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential
is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip
W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year. On one side, early exit from monetary
and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant.
On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase
long-term interest rates (because of concerns about medium-term fiscal sustainability and because of an increase in expected
inflation), thus leading to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery
will be weak given the debt overhang in the household sector, the financial system and the corporate sector. Now there is
also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
“Also, as I fleshed out in detail in recent remarks the labor market is still very weak. I predict a peak unemployment rate of close to 11% in 2010. Such a large
unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the
housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards,
auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented);
and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the U.S.
and the global economy. But as I have consistently argued, the recession will continue through the end of the year, and the
recovery will be weak and at risk of a double-dip, as the challenge of getting right the timing and size of the exit strategy
for monetary and fiscal policy easing will be daunting.
