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Roubini: Economic Soft Patch Not Just Temporary

Friday, 24 Jun 2011 09:44 AM

Economist Nouriel Roubini says that the current economic slowdown is much more than a temporary soft patch.
 
"If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves empty-handed," Roubini writes at project-syndicate.com.
 
"If that happens, the risk of stall speed or an outright double-dip recession would rise sharply in many advanced economies."
 
Despite the series of low-probability, high-impact events that have hit the global economy in 2011, financial markets continued to rise undeterred for several months, Roubini observes.
 
“But, since the end of April, a more persistent correction in global equity markets has set in, driven by worries that economic growth in the United States and worldwide may be slowing sharply,” he says.
 
Optimists argue that the global economy has merely slowed down for a while, says Roubini, but there are good reasons to believe that we are experiencing a more persistent slump.
 
A “lack of policy bullets is reflected in most advanced economies’ embrace of some form of austerity, in order to avoid a fiscal train wreck down the line,” Roubini points out. “Public debt is already high, and many sovereigns are near distress, so governments’ ability to backstop their banks via more bailouts, guarantees, and ring-fencing of questionable assets is severely constrained.
 
“Another round of so-called quantitative easing by monetary authorities may not occur as inflation is rising — albeit slowly — in most advanced economies.”
 
In other words, if what is happening now turns out to be something worse than a temporary soft patch, the market correction will continue further, thus weakening growth as the negative wealth effects of falling equity markets reduce private spending, according to Roubini.
 
And, Roubini points out, unlike in 2007-2010, when every negative shock and market downturn was countered by more policy action by governments, this time around policymakers are running out of ammunition, and thus may be unable to trigger more asset reflation and jump-start the real economy.
 
Bloomberg reports that 79 percent of 58 economists surveyed expect Federal Reserve Chairman Ben Bernanke to sustain the Fed balance sheet at current levels until October or later, compared with 52 percent who held that view before the Fed’s last policy meeting in April.
 
Ninety percent of those surveyed predict the Fed will wait until the fourth quarter before dropping its pledge to hold interest rates low for an “extended period.”
 

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Economist Nouriel Roubini says that the current economic slowdown is much more than a temporary soft patch. If the latest global economic data reflect something more serious than a hiccup, and markets and economies continue to slow, policymakers could well find themselves...
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2011-44-24
Friday, 24 Jun 2011 09:44 AM
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