Among economists, Nouriel Roubini has been cast as the house pessimist since the start of this crisis. Such is his reward for being among the first to see it all coming. But Roubini may have been underselling the gravity of the situation in the 2009 forecast he offered at the start of the year: 3.4 percent GDP decline this year, 1 percent growth next year. Those numbers don’t look so bad now; if there were a way to lock them in, I’d go for it. Wouldn’t you?
But that forecast came with baggage. “If the U.S. does not do it right,” he warned, “this U.S. and global recession may turn into a nasty multiyear L-shaped, near-Depression like the one experienced by Japan.” Until quite recently, Roubini made that possibility sound unlikely. According to his latest column in Forbes, however, Roubini’s outlook has soured markedly. The hamhanded U.S. efforts to come up with a bank rescue policy are a big factor in his outlook, but so is the pace and severity of the economic declines elsewhere around the world:
With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing — even unorthodox — is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don’t react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates. …
[G]iven the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
It’s been chilling to see talk of a full-blown depression emerging more and more frankly in the financial press. The other day in the Wall Street Journal, Harvard economist Robert Barro handicapped the odds at 20 percent.
More: “Staring into the abyss:” The WSJ’s Real-Time Economics blog excerpts the reactions of economists and analysts to the February unemployment report.