Are we heading for a 'long, ugly' global recession?

Renowned economist Nouriel Roubini, who correctly predicted the 2008 global financial crisis, has warned of a stark “long and ugly” recession in the US and globally occurring at the end of 2022.

Roubini, whose alarming precognition on the housing bubble crash of 2007 to 2008 earned him the nickname Dr Doom, said the looming crisis, the sixth global recession post-World War II, could last through 2023.

“This will bring stagflation akin to the 1970s in the US and a debt crisis like the global meltdown. It’s not going to be a short and shallow recession, it’s going to be severe, long, and ugly,” he was quoted as saying.

Since WW II, the world economy has witnessed five global recessions— in 1975, 1982, 1991, 2009, and 2020 — and four global downturns, namely in 1958, 1998, 2001, and 2012. The 2020 recession was the deepest and most internationally synchronized after the Global Financial Crisis of 2008–2009.

Dr Doom’s dire warning resonates with the bleak observation made by the World Bank that the world is moving towards a recession in 2023.

In its latest study, the World Bank reveals that several historical indicators of global recessions are already flashing warnings.

“The global economy is now in its steepest slowdown following a post-recession recovery since 1970. Global consumer confidence has already suffered a much sharper decline than in the run-up to previous global recessions.”

The World Bank study further points out that the world’s three largest economies — the United States, China, and the euro area — have been slowing sharply. Under the circumstances, even a moderate hit to the global economy over the next year could tip it into recession.

The World Bank points out that to cut global inflation to a rate consistent with their targets, central banks may need to raise interest rates by an additional two percentage points. If this were accompanied by financial-market stress, global GDP growth would slow to 0.5 per cent in 2023 — a 0.4 per cent contraction in per–capita terms that would meet the technical definition of a global recession.

“Global growth is slowing sharply, with further slowing likely as more countries fall into recession. My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging markets and developing economies,” said World Bank Group president David Malpass.

On Monday, the Organisation for Economic Cooperation and Development said that global economic growth is slowing more than was forecast a few months ago in the wake of Russia's invasion of Ukraine, as energy and inflation crises risk snowballing into recessions in major economies.

"The global economy has lost momentum in the wake of Russia's unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown," OECD secretary-general Mathias Cormann said in a statement.

While global growth this year is still expected at three per cent, it is now projected to slow to 2.2 per cent in 2023, revised down from a forecast in June of 2.8 per cent, the OECD said. Global output next year is now projected to be $2.8 trillion lower than the OECD forecast before Russia attacked Ukraine - a loss of income worldwide equivalent in size to the French economy.

Roubini also predicted “a real hard landing” for the markets leading to sharp correction in the S&P 500. “Even in a plain vanilla recession, the S&P 500 can fall by 30 per cent,” said Roubini, chairman, and chief executive officer of Roubini Macro Associates.

He warned that global debt levels will drag down markets, and said as rates rise and debt servicing costs increase, “many zombie institutions, zombie households, corporates, banks, shadow banks, and zombie countries are going to die. So, we will see who is swimming naked.”

He argued that achieving a 2.0 per cent inflation rate without a hard landing is going to be “mission impossible” for the Federal Reserve. The US Central Banking System will “probably have no choice” but to hike more, and lending rates will further go up, he said and expects a 50 basis point in both November and December. That would lead the Fed funds rate by year’s end to be between 4.0 per cent and 4.25 per cent.

He sees no quick cure to the financial meltdown as he believes that the debt-ridden governments are “running out of fiscal bullets.”

Larry Summers, a Harvard economics professor, and former Treasury secretary, argues that the Fed will have to go much higher than most are expecting to cool runaway inflation. His greatest worry is that the Fed will back off too soon. He said if the Fed backs off, “inflationary expectations will become entrenched,” and the eventual cure will be far costlier than shouldering what could be a shorter, shallower downturn in the months ahead.

— issacjohn@khaleejtimes.com