Mild signs that the rate of economic contraction is slowing in the US, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year and that a similar recovery will occur in other advanced economies. The emerging consensus among economists is that growth next year will be close to the trend rate of 2.5 percent.
Investors are talking of “green shoots” of recovery and of positive “second derivatives of economic activity” (continuing economic contraction is the first, negative, derivative, but the slower rate suggests that the bottom is near). As a result, stock markets have started to rally in the US and around the world. Markets seem to believe that there is light at the end of the tunnel for the economy and for the battered profits of corporations and financial firms.
This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from minus 6 percent in the last two quarters, US growth will still be negative (around minus 1.5 percent to minus 2 percent) in the second half of the year (compared with the bullish consensus of 2 percent). Moreover, growth next year will be so weak (0.5 percent to 1 percent, as opposed to the consensus of 2 percent or more) and unemployment so high (above 10 percent) that it will still feel like a recession.
In the euro zone and Japan, the outlook for this year and next year is even worse, with growth close to zero even next year. China will have a more rapid recovery later this year, but growth will reach only 5 percent this year and 7 percent next year, well below the average of 10 percent over the last decade.
Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are US$3.6 trillion in losses for loans and securities issued by US institutions, and US$1 trillion for the rest of the world.
It is said that the IMF, which earlier this year revised upward its estimate of bank losses, from US$1 trillion to US$2.2 trillion, will announce a new estimate of US$3.1 trillion for US assets and US$0.9 trillion for foreign assets. By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses.
Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession. But, in the last two years, the stock market has predicted six out of the last zero economic recoveries — that is, six bear market rallies that eventually fizzled and led to new lows.
The stock market’s latest “dead cat bounce” may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast the consensus expects.
Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms’ pricing power and keep profit margins low.
Third, financial shocks will be worse than expected. At some point, investors will realize that bank losses are massive and that some banks are insolvent. Deleveraging by highly leveraged firms — such as hedge funds — will lead them to sell illiquid assets in illiquid markets. And some emerging market economies — despite massive IMF support — will experience a severe financial crisis with contagious effects on other economies.
So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.
To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.
Still, this global recession will continue for a longer period than the consensus suggest. There may be light at the end of the tunnel — no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. The same is true for a sustained recovery of financial markets.
Nouriel Roubini is professor of economics at the Stern School of Business, New York University
COPYRIGHT: PROJECT SYNDICATE
Two sets of economic data released last week by the Directorate-General of Budget, Accounting and Statistics (DGBAS) have drawn mixed reactions from the public: One on the nation’s economic performance in the first quarter of the year and the other on Taiwan’s household wealth distribution in 2021. GDP growth for the first quarter was faster than expected, at 6.51 percent year-on-year, an acceleration from the previous quarter’s 4.93 percent and higher than the agency’s February estimate of 5.92 percent. It was also the highest growth since the second quarter of 2021, when the economy expanded 8.07 percent, DGBAS data showed. The growth
In the intricate ballet of geopolitics, names signify more than mere identification: They embody history, culture and sovereignty. The recent decision by China to refer to Arunachal Pradesh as “Tsang Nan” or South Tibet, and to rename Tibet as “Xizang,” is a strategic move that extends beyond cartography into the realm of diplomatic signaling. This op-ed explores the implications of these actions and India’s potential response. Names are potent symbols in international relations, encapsulating the essence of a nation’s stance on territorial disputes. China’s choice to rename regions within Indian territory is not merely a linguistic exercise, but a symbolic assertion
More than seven months into the armed conflict in Gaza, the International Court of Justice ordered Israel to take “immediate and effective measures” to protect Palestinians in Gaza from the risk of genocide following a case brought by South Africa regarding Israel’s breaches of the 1948 Genocide Convention. The international community, including Amnesty International, called for an immediate ceasefire by all parties to prevent further loss of civilian lives and to ensure access to life-saving aid. Several protests have been organized around the world, including at the University of California Los Angeles (UCLA) and many other universities in the US.
Every day since Oct. 7 last year, the world has watched an unprecedented wave of violence rain down on Israel and the occupied Palestinian Territories — more than 200 days of constant suffering and death in Gaza with just a seven-day pause. Many of us in the American expatriate community in Taiwan have been watching this tragedy unfold in horror. We know we are implicated with every US-made “dumb” bomb dropped on a civilian target and by the diplomatic cover our government gives to the Israeli government, which has only gotten more extreme with such impunity. Meantime, multicultural coalitions of US