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
Recently, the Liberty Times (the Taipei Times’ sister newspaper) published three of my articles on the US presidential election, which is to be held on Nov. 5. I would like to share my perspective on the intense and stalemated presidential election with the people of Taiwan, as well as Taiwanese and Chinese Americans in the US. The current consensus of both major US political parties is to counter China and protect Taiwan. However, I do not trust former US president Donald Trump. He has questioned the US’ commitment to defending Taiwan and explicitly stated the significant challenges involved in doing so. “Trump believes
The government is considering building a semiconductor cluster in Europe, specifically in the Czech Republic, to support Taiwan Semiconductor Manufacturing Co’s (TSMC) new fab in Dresden, Germany, and to help local companies explore new business opportunities there. Europe wants to ensure the security of its semiconductor sector, but a lack of comprehensive supply chains there could pose significant risks to semiconductor clusters. The Czech government is aggressively seeking to build its own semiconductor industry and showing strong interest in collaborating with Taiwanese companies. Executive Yuan Secretary-General Kung Ming-hsin (龔明鑫) on Friday said that Taiwan is optimistic about building a semiconductor cluster in
China has successfully held its Forum on China-Africa Cooperation, with 53 of 55 countries from the African Union (AU) participating. The two countries that did not participate were Eswatini and the Sahrawi Arab Democratic Republic, which have no diplomatic relations with China. Twenty-four leaders were reported to have participated. Despite African countries complaining about summit fatigue, with recent summits held with Russia, Italy, South Korea, the US and Indonesia, as well as Japan next month, they still turned up in large numbers in Beijing. China’s ability to attract most of the African leaders to a summit demonstrates that it is still being
The Russian city of Vladivostok lies approximately 45km from the Sino-Russian border on the Sea of Japan. The area was not always Russian territory: It was once the site of a Chinese settlement. The settlement would later be known as Yongmingcheng (永明城), the “city of eternal light,” during the Yuan Dynasty. That light was extinguished in 1858 when a large area of land was ceded by the Qing Dynasty to the Russian Empire with the signing of the Treaty of Aigun. The People’s Republic of China founded by the Chinese Communist Party (CCP) has never ruled Taiwan. Taiwan was governed by the
RSS