UAE presents a beacon of hope in the region
Lawrence Summers and Nouriel Roubini discuss oil prices, the US Fed rate hike and the state of the world economy at the Arab Strategy Forum in Dubai on Tuesday. - Photos by Rahul Gajjar
Dubai - Global growth is below potential, say experts at Arab Strategy Forum.
The UAE presents a positive model and a beacon of hope at a time when many countries in the region are facing deep crises, former US Treasury Secretary Lawrence Summers said on Tuesday.
Speaking at the Arab Strategy Forum, Summers said it would not be wise for GCC governments to plan their budget balance without considering the possibility of the price of oil staying under $50 a barrel.
He said the US Federal Reserve policy makers risk making a mistake that would be difficult to correct if they raise interest rates today.
Eminent economist Nouriel Roubini, who was also a panellist at the forum, echoed the sentiment. Roubini, who is known as 'Dr Doom' for predicting the 2008 global recession, said the dilemma facing the Fed is that labour market data suggest it is time to start hiking, but there is no sign of inflation in the economy.
"A decision to delay rates runs risks that are easily reversed by subsequently raising rates, whereas a decision to raise rates, if it proves to have been the wrong decision, is a much more difficult decision to correct," Summers said.
At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results, said Summers.
"There are still substantial questions about the growth prospect, about the prospect of achieving the two per cent inflation target, about uncertainties in financial markets," Summers said. "In a world where error is inevitable, it's much better to make easily reversed errors than to make difficult-to-reverse errors."
He observed that there is no certainty that what the Fed does is going to drive the US dollar up. "Roughly what will happen to the dollar going forward will depend on which way the Fed surprises. If the Fed goes as predicted, there will be no further dramatic impacts on the dollar. I don't think the world needs larger divergences. Larger appreciation of the dollar will further depress impact on capital flows to developing countries."
Looking ahead at the state of the world in 2016, Roubini said potential growth is falling, while actual growth is below potential. "Monetary policies are still unconventional, with interest rates hovering around zero. While many have assumed that high inflation would be the outcome, in reality the reverse has happened."
"Inflation has become lower and lower in the US and the UK. Next year in Eurozone and Japan, inflation is going to stay low, inflation in the US may go higher at the headline level. Growth is below potential. Real interest rates are going to be low," Roubini said.
Summers spoke of 'continuing secular stagnation that is registering high savings and low investments'. "Whatever you want to call it, secular stagnation has been evolving for quite some time into a new world where the propensity to save is high relative to propensity to invest".
According to Roubini, there is more of a public private debt, with painful deleveraging, increasing inequality, demographics and an imbalance between saving and investment.
"In spite of innovations, we still have growth falling. However, I will be slightly optimistic for the following reason - we are on the cusp of a major technology revolution that will be changing the world: leading to increase in productivity. We have energy technology, biotech with all major innovation in bio medical research; information technology: social media, Internet of things, as well as manufacturing technology, financial technology and finally defence technology."
Concurring with Summers on the need for aggressive infrastructure spending, Roubini said: "The exception is China which has done overinvestment in infrastructure. But emerging countries and even in the Middle East, there is a huge demand for infrastructure. And even in advanced economies such as Europe and Japan."
Roubini said 2015 has been the year of strength for the US dollar with the trend likely to continue in 2016. "If the Fed starts hiking rates this week, it has to make sure that two things don't occur: the pace of normalisation is so fast that you get a sharp appreciation of the dollar, and two, if you hike too much, capital spending will be affected."
Commenting on China, Roubini said growth potential in 2016 is six per cent plus or minus. "The good news is that they will not have to devalue their currency. I don't see a global recession next year."
Summers observed that while looking at China, the fundamentals go beyond financials. For example, China's ageing labour force and the process of transition of low productivity of rural areas into high productivity urban areas is over.
He added that the effects of economic slowdown will remain for a while. "Although we are not in 2008-2009 anymore, we are not back to normal. It is important to find ways of innovative financing, especially through partnerships between public and private sectors, reduce spending and bring in better accountancy in addition to identifying priorities without delaying major projects on the pretext of debts."