The latest macroeconomic news from the US, other advanced economies and emerging markets confirms that the global economy will face a severe recession next year. In the US, recession started last December, and will last at least until next December — the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5 percent.
The recession in other advanced economies (the euro zone, the UK, the EU, Canada, Japan, Australia and New Zealand) started in the second quarter of this year, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more severe since then.
There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices and capital flight take their toll on growth.
Indeed, the world should expect a near recession in Russia and Brazil next year, owing to low commodity prices, and a sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries.
Other emerging markets in Asia, Africa, Latin America and Europe will not fare better, and some may experience full-fledged financial crises. More than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey and Ukraine in Europe; Indonesia, South Korea and Pakistan in Asia; and Argentina, Ecuador and Venezuela in Latin America.
Most of these economies can avoid the worst if they implement the appropriate policy adjustments and if the international financial institutions — including the IMF — provide enough lending to cover their external financing needs.
With a global recession a near certainty, deflation — rather than inflation — will become the main concern for policymakers. The fall in aggregate demand while potential aggregate supply has been rising because of overinvestment by China and other emerging markets will sharply reduce inflation. Slack labor markets with rising unemployment rates will cap wage and labor costs.
Further falls in commodity prices — already down 30 percent from their summer peak — will add to these deflationary pressures.
Policymakers will have to worry about a strange beast called “stag-deflation” (a combination of economic stagnation, recession and deflation); about liquidity traps (when official interest rates become so close to zero that traditional monetary policy loses effectiveness); and about debt deflation (the rise in the real value of nominal debts, increasing the risk of bankruptcy for distressed households, firms, financial institutions and governments).
With traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary. And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important.
In the process, the role of states and governments in economic activity will be vastly expanded.
Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. As banks curtail lending to each other, to other financial institutions and to the corporate sector, central banks are becoming the only lenders around.
Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households.
The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.
Nevertheless, in the short run, very aggressive monetary and fiscal policy actions — both traditional and non-traditional — must be undertaken to ensure that the inevitable stag-deflation of next year does not persist into 2010 and beyond.
So far, the US response appears to be more aggressive than that of the euro zone as the European Central Bank falls behind the curve on interest rates and the EU’s fiscal stance remains weak.
Given the severity of this economic and financial crisis, financial markets will not mend for a while. The downside risks to the prices of a wide variety of risky assets (equities, corporate bonds, commodities, housing and emerging-market asset classes) will remain until there are true signs — toward the end of next year — that the global economy may recover in 2010.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University, and chairman of RGE Monitor, an economic consultancy.
COPYRIGHT: PROJECT SYNDICATE
Taiwanese pragmatism has long been praised when it comes to addressing Chinese attempts to erase Taiwan from the international stage. “Taipei” and the even more inaccurate and degrading “Chinese Taipei,” imposed titles required to participate in international events, are loathed by Taiwanese. That is why there was huge applause in Taiwan when Japanese public broadcaster NHK referred to the Taiwanese Olympic team as “Taiwan,” instead of “Chinese Taipei” during the opening ceremony of the Tokyo Olympics. What is standard protocol for most nations — calling a national team by the name their country is commonly known by — is impossible for
India is not China, and many of its residents fear it never will be. It is hard to imagine a future in which the subcontinent’s manufacturing dominates the world, its foreign investment shapes nations’ destinies, and the challenge of its economic system forces the West to reshape its own policies and principles. However, that is, apparently, what the US administration fears. Speaking in New Delhi last week, US Deputy Secretary of State Christopher Landau warned that “we will not make the same mistakes with India that we did with China 20 years ago.” Although he claimed the recently agreed framework
The Office of the US Trade Representative (USTR) on Wednesday last week announced it is launching investigations into 16 US trading partners, including Taiwan, under Section 301 of the Trade Act of 1974 to determine whether they have engaged in unfair trade practices, such as overproduction. A day later, the agency announced a separate Section 301 investigation into 60 economies based on the implementation of measures to prohibit the importation of goods produced with forced labor. Several of Taiwan’s main trading rivals — including China, Japan, South Korea and the EU — also made the US’ investigation list. The announcements come
Taiwan is not invited to the table. It never has been, but this year, with the Philippines holding the ASEAN chair, the question that matters is no longer who gets formally named, it is who becomes structurally indispensable. The “one China” formula continues to do its job. It sets the outer boundary of official diplomatic speech, and no one in the region has a serious interest in openly challenging it. However, beneath the surface, something is thickening. Trade corridors, digital infrastructure, artificial intelligence (AI) cooperation, supply chains, cross-border investment: The connective tissue between Taiwan and ASEAN is quietly and methodically growing
RSS