Submitted by Taps Coogan on the 23rd of January 2019 to The Sounding Line.

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Dr. Nouriel Roubini, chairman and founder of Roubini Macro Associates and Professor at NYU Stern School of Business, recently spoke with Real Vision about his outlook for the global economy in 2020 and beyond. Dr. Roubini, who is known for his vocal predictions of the Global Financial Crisis, says that he expects the current economic slowdown to continue, though he sees an outright recession as unlikely. He cautions that the popular ‘reflation’ narrative may be overlooking continued economic weakness in Europe, China, and other key markets. He also warns that, while inflation appears to be structurally lower and will likely head even lower during the next recession, de-globalization and the potential for various supply side shocks may lead to a return of ‘stagflation.’

 

Some excerpts from Dr. Nouriel Roubini:

“…We are in the middle of what’s called a synchronized economic slowdown, a slowdown that implies that growth is still positive but is slower than before… Despite that slowdown in growth, this year (2019) US equities turned out to do very well, in part because some of the tail risks that people worried about during the year, whether that was the risk of a full-scale trade war between the US and China, or a hard Brexit, or a war between the US and Iran in the Middle East, those risks have turned out to be milder than previously expected… Secondly, the Fed, the ECB, and other central banks… came to the rescue of the markets…”

“The first question you have to ask yourself is what happens to the global economy (in 2020), because it effects markets and policies… I would say there are three scenarios. Scenarios number one is the more optimistic one, is the one being pushed by a number of sell side firms on Wall Street, that says we had a slowdown but now some of these tail risks are disappearing. Financial conditions are easing because what of the Fed, the ECB, and other central banks have done, so we are going to go back to an economic expansion. Not very robust. So instead of having 3% growth like (2019), we are going to go back to having 3.4%. That is okay but it is not as strong as it was in 2017 for the global economy… And that might be an ideal scenario for US and global equities.”

“My view of the world today is that rather than that scenario, we may have a continuation of this global slowdown… That is the bad news. The good news is the more extreme negative scenario, that would be my third scenario, would be of a global recession. And I would say that as long as the US and China have a trade deal, as long as Brexit is soft, as long as we don’t have a war in the Middle East between US and Iran, and as long as central banks remain on hold on accomodative policies, probably the risk of an outright recession is relatively low…”

“…This argument that we are at the bottom of this slowdown doesn’t seem to be borne by the data. If you look at the data for Europe, for Germany, for China, for many emerging markets, yeah things are not becoming worse, but they are not improving…”

“Some of the tail risks that may hit the global economy in the next few years may not be aggregate demand shocks but negative aggregate supply shocks. If we are going to have restrictions to trade by the US or China… that’s a shock that reduces economic activity while also producing inflation… if you are going to have hard Brexit and other shocks that reduce potential growth… you are going to have potential higher costs because of the trade friction. Of course, if you have another oil shock because you go to war with Iran in the Middle East like 1973, 1979, and 1990 where (you had) a global stagflationary shocks, growth is going to be lower and inflation is going to be higher. Of course, in  Aworld where you have a populist backlash against trade, migration, globalization, even technology… all these frictions are essentially equivalent to negative supply shocks that reduce growth and rise inflation…”

Even during the era of rising inflation during the late 1960s and 1970s, the rate of inflation fell during actual recessions. The key differentiation between that period and now, was that inflation rose in to new highs in the periods intervening recessions and each expansion ended with higher inflation than the previous one. The opposite has been true for every expansion after 1980. However, despite the popular narrative that inflation is persistently low today, headline and core CPI are both higher than they were in August of 2007. While CPI inflation spiked above today’s levels in the last few months before the official start of the Financial Crisis, practically speaking, the inflation rate at the end of the last expansion was the same as it is today. Given the massive levels of monetary and fiscal stimulus being pumped into the economy, it is entirely plausible that this expansion will end with higher inflation than the last expansion, ending a nearly 40 years trend.

There is much more to the wide ranging interview, so enjoy it above.

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