Roubini predicted financial shock and the return of the "worst of the 1970s"
American economist Nouriel Roubini, CEO of Roubini Macro Associates, predicts the global economy will fall into a stagflation trap as central banks struggle to contain inflationary expectations. This point of view, according to Bloomberg, he expressed in an interview with the Odd Lots podcast - his previous speech in this format, the agency calls "prophetic." Then in May 2020, Roubini warned that the economic recovery from the pandemic would be followed by a period of high inflation due to a combination of supply shocks and aggressive easing by regulators.
Roubini points to several factors that lead him to predict stagflation: stocks are down more than 20% this year, private equity tensions, a cooling U.S. real estate market , and reduced credit after companies have been piling on debt for years, taking advantage of low interest rates. rates.
Stagflation is a phenomenon that combines three factors: sluggish economic growth or its absence (stagnation), high inflation and unemployment.
In his opinion, the collapse of several major players, as happened in 2008 with Lehman Brothers, could finally provoke a shock in the financial market under these conditions.
“There are a couple of large and system firms that can sink. There may be another "Lehman effect" and then the Fed will have to loosen [policy]. You will have a severe recession and you will have a shock in the financial market,” he describes this scenario. Roubini does not expect a rapid decline in inflation, explaining this by a decline in supply on the market.
He describes the overall situation in the world economy as "a period that combines the worst of the 1970s and the global financial crisis."
“We had two stagflationary shocks in the 1970s: inflation and recession. But debt ratios were 100% of GDP for the private and public sectors of advanced economies. After the global financial crisis, linked to the debt crisis - mortgage, housing, banking - we still had deflation, because it was a combination of a negative aggregate demand shock and a debt crisis. As a result, we were able to ease monetary and fiscal policies. But today we have a debt-to-GDP ratio of 350% globally and 420% in advanced economies,” he explains.
In addition to purely market factors, Roubini sees others that can exacerbate the crisis. Among them, the economist names the ongoing hostilities in Ukraine, the disruption of supply chains from China, the continuing aging of the population, the spread of populism and the growing influence of trade unions. Separately, he singles out de-dollarization as a consequence of the introduction of US sanctions.
According to previously published estimates by Goldman Sachs economists, the probability of a recession over the next year in the US is 30%. If a recession can be avoided, its probability in the next year is estimated at 25%. The chance of a recession in the next two years is cumulatively 48%, warn Goldman Sachs.
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