Will world growth continue or are we heading for a slowdown? -Nouriel Roubini
Will world growth continue or are we heading for a slowdown?
For the past few years, the global economy has been oscillating between periods of acceleration (when growth is positive and strengthening) and periods of deceleration (when growth is positive but weakening). After more than a year of acceleration, is the world heading towards another slowdown, or will the recovery persist?
Will the recent growth spurt continue over the next few years? Or is the world experiencing a temporary cyclical upswing that will soon be subdued by new tail risks, such as those that have triggered other slowdowns in recent years? It is enough to recall the summer of 2015 and early 2016, when investors’ fears of a Chinese hard landing, an excessively fast exit from zero policy rates by the US Federal Reserve, a stall in US GDP growth and low oil prices conspired to undercut growth.
One can envision three possible scenarios for the global economy in the next three years or so. In the bullish scenario, the world’s four largest, systemically important economies – China, the eurozone, Japan and the US – implement structural reforms that increase potential growth and address financial vulnerabilities. By ensuring that the cyclical upswing is associated with stronger potential and actual growth, such efforts would produce robust GDP growth, low but moderately rising inflation and relative financial stability for many more years. US and global equity markets would reach new heights, justified by stronger fundamentals.
As for the US, the Trump administration, in this scenario, continues to pursue a policy approach, including a tax cut that overwhelmingly favours the rich, trade protectionism and migration restrictions, which may well reduce potential growth. Excessive fiscal stimulus leads to runaway deficits and debt, which results in higher interest rates and a stronger dollar, further weakening growth. Trigger-happy Trump could even end up in a military conflict with North Korea, and, later Iran, diminishing US economic prospects further.
In this scenario, the lack of reform in major economies will leave the cyclical upswing constrained by low trend growth. If potential growth remains low, easy monetary and credit policies could eventually lead to goods and/or asset inflation, eventually causing an economic slowdown – and possibly an outright recession and financial crisis – when asset bubbles burst or inflation rises.
The third and in my view most likely scenario lies somewhere between the first two. The cyclical upswing in growth and equity markets continues for a while, driven by the remaining tailwinds. Yet, while major economies pursue some structural reforms to improve potential growth, the pace of change is much slower, and the scope more modest, than is needed to maximise potential.
In China, this muddle-through scenario means doing just enough to avoid a hard landing, but not enough to achieve a truly soft one; with financial vulnerabilities left unaddressed, distress becomes all but inevitable over time. In the eurozone, this scenario would entail only nominal progress towards greater integration, with Germany’s continued rejection of true risk-sharing or fiscal union weakening incentives for struggling member countries to undertake tough reforms. In Japan, an increasingly ineffective Abe administration would implement minimal reforms, leaving potential growth stuck below 1%.
But the risks of muddling through extend far beyond mediocre economic performance. This scenario represents not a stable equilibrium, but an unstable disequilibrium, vulnerable to economic, financial and geopolitical shocks. When such shocks eventually emerge, the economy will be tipped into a slowdown or, if the shock is large enough, even recession and financial crisis.
In other words, if the world does simply muddle through, as seems likely, it could, within three or four years, face a more bearish outlook. The lesson is clear: either political leaders and policymakers demonstrate the leadership needed to secure a better medium-term outlook, or downside risks will materialise before long – and do serious damage to the global economy.
• Nouriel Roubini is a professor at NYU’s Stern School of Business. He was a senior economist for international affairs in Bill Clinton’s White House and has worked for the International Monetary Fund, the Federal Reserve and the World Bank.