A Senior Economist and Professor of Economics at Stern School of Business, Prof. Nouriel Roubini, on Tuesday said developed economies may likely witness a devastating economic recession in the next few years unless the challenges in Euro zone are addressed.
He said this at the Commonwealth Business Forum in Perth today. He said there were potential positive and negative impacts stemming from the current global and financial turbulence and uncertainty surrounding the Eurozones.
He said there is more than 50 percent chance of global recession that could force the break-up of the eurozones.
The New York University professor said that the Chinese economic growth may witness hard landing soon.
He expressed regrets that many countries are running out of “policy bullets.”
He said the economic signals from sub-Saharan African countries are encouraging but asked African countries to watch their back because shocks which may hurt developed economies will affect them too.
Roubini, who predicted the global financial crisis of 2008, made the prediction in a keynote address to 1,200 world business leaders at the Commonwealth Business Forum in Burswood Complex, Burswood in Australia.
Roubini, who was introduced as “Dr. Doom” to the audience, however said “I am Dr. Realist” trying to offer suggestions.
He said: “There is going to be a big recession in advanced economies; there is going to be a painful process of deep recession. This is about more than 50 per cent possibility. Although Australia and Canada are doing well, the recession is likely to affect the United States, the UK and the Euro zone. I think the chances of recession are significant.
“If the Euro zone is able to control its economic crisis, the recession in developed economies will be mild. But if the zone could not, the recession could be as large as the collapse of Lehman in 2008.
“The recession is going to be severe in advanced economies but it depends very large on the Euro zone. Why do I worry about Euro zone? The problems of the Euro zone are chronic. There is banking crisis in the zone; there is liquidity crisis and it has ageing demographic outlook.
“The reaction of the zone has been disturbing as they claimed that they have a problem of liquidity rather than insolvency.
“The Europeans claimed that they have a plan. This plan is mostly financial engineering, not about economic growth. It is an unstable equilibrium of debt reduction and restructuring. Unless you have economic growth, there will be political backlash against any austerity measure. The government is going to collapse. Once you lose your market credibility, then you are in a big crisis. If the GDP keeps on falling, your debt goes up to the roof.
“The world is uncertain. But I would say that there will be economic contractions in the US, Euro zone, in the UK and Japan.
“A number of factors suggested this recession. The US almost shut down its government this year because of deficits. The crisis in the Euro zone and the shocks coming from Tunisia, Libya and the Middle-East are not giving way. There is tension in financial markets.
“If you look at the market data, the Europe is already in recession now. We are now running out of policy bullets. On the fiscal side, the UK and the US are doing fiscal austerity.
He said the US is already feeling the signs of the coming recession.
He added: “The US economic growth for the first half of this year is less than one per cent. Some people attributed this to temporary factors; most people said they were just temporary shocks. The consensus is that by the second half of the year, the growth rate will be about 3.5per cent
“In the US, the unemployment rate is about 9 per cent. This has a negative effect on consumers’ income. President Barack Obama’s plan about fiscal stimulus is necessary but there is gridlock in the Congress. We are in a state of gridlock; it is going to be worse.
Replying a question from the Co-Chair of the Commonwealth Business Council, Mr. Paschal Dozie, the expert said: “If you look at Africa, many countries in East Africa like Rwanda and Botswana are doing well. In sub-Saharan Africa, Nigeria and Ghana have shown signs of economic growth. A number of these sub-Sahara African countries are now improving.
“But as long as the global economy grows, there will be positive effects on sub-Sahara Africa. If there is shock in US and Europe, of course it will have negative effects on sub-Sahara Africa.
Roubini also warned all banks against sliding into fresh stress because they cannot get any bail out.
“If banks witness any stress, it is not going to be possible to bail them out. There are no fiscal resources available to support any banking crisis.”
On China, he said it must slow down to avert “hard landing.”
“In the short run, China is growing very fast. I don’t expect hard landing this year, not next year, because it will do anything necessary to retain eight per cent growth in the next eight months.
“In 2009, when there was a collapse of exports, China achieved a miracle of eight per cent growth. How? They did not increase consumption; they increased fixed investments from 42 per cent to 49 per cent “Half of GDP in China is fixed investments. And it may be up to 80per cent of the GDP. Unless China changes its way, it may experience hard landing.”
On her part, the Prime Minister of Australia, Julia Gillard, said: “All of us stand to suffer if the correct reforms are not forthcoming. The global financial market continues to fluctuate, more needs to be done.
“The road to economic recovery will not be easy but I remain optimistic. It is time we must prove ourselves that we are up to the task.”
She said the “G-20 Action Plan will need to outline strong development agenda” to save vulnerable ones.
“The developing world’s agenda must be central to the G-20. We look forward to our friends in the bigger economies.”
The Prime Minister of Trinidad and Tobago, Mrs. Kamla Persad-Bissessar, said: “Without partnership, there cannot be any meaningful development. Partnership is the order of the day.”