“Last year I argued that this will be a long and deep and protracted U-shaped recession that would last 24 months. The consensus argued this would be a short and shallow V-shaped 8 months long recession as in 1990-91 and 2001.
That debate is over as we are in the 19th month of a severe recession. The V is out the window and we are in a deep U-shaped recession.
If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two.
“While the consensus is the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.
“I have also consistently argued that there is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year. On one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant.
On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long-term interest rates (because of concerns about medium-term fiscal sustainability and because of an increase in expected inflation), thus leading to a crowding out of private demand.
“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector. Now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation.
I predict a peak unemployment rate of close to 11% in 2010. Such a large unemployment rate will have negative effects on labor income and consumption growth; will postpone the bottoming out of the housing sector; will lead to larger defaults and losses on bank loans (residential and commercial mortgages, credit cards, auto loans, leveraged loans); will increase the size of the budget deficit (even before any additional stimulus is implemented); and will increase protectionist pressures.
“So, yes there is light at the end of the tunnel for the US and the global economy. But as I have consistently argued, the recession will continue through the end of the year, and the recovery will be weak and at risk of a double-dip, as the challenge of getting right the timing and size of the exit strategy for monetary and fiscal policy easing will be daunting."
Nouriel Roubini is Professor of Economics at the Stern School of Business at NYU and Chairman of RGE Monitor. Known as Dr Doom, his comments hold equally well for the UK. As for timing, the old adage, watch the US and add six months still holds, with anticipated recovery in the UK anticipated late into Q2 2010.
Roubini - Statement of US Economic Outlook RGE Monitor
Perotcharts : CBO’s estimate of the President’s Budget
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How do you improve the economy? Simple, improve the United States. Clean up the U.S., reduce pollution, reduce crime, improve infrastructure, rebuild old rust belt cities, plant a few billion trees, conserve more, use less, waste less energy and we will be living in a paradise. Then everybody will want to live in the United States! Sometimes the simplest answer was there all along.
Posted by: James S. Klich II | July 30, 2009 at 02:19 AM