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Roubini sees emerging countries exiting recession faster, warns of risks of W-shaped recovery
Source: BI-ME , Author: BI-ME staff
Posted: Fri July 17, 2009 11:03 am

INTERNATIONAL. Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), said developed economies are bottoming out or close to doing so, but the recovery will be anemic, with the US remaining in recession throughout the year, while emerging countries are in better shape to exit the recession faster.

Speaking to investors at an event organised by the Chilean government in New York Roubini said: ""There is light at the end of the tunnel, there is a bottoming out of the U.S. and of the global economy. And the light at the end of the tunnel for once is not an incoming train."

"In many ways, the worst is behind us in terms of economic and financial conditions," he said.

“The freefall of the economy has stopped.”

Roubini reiterated his view that US unemployment will top 10% by the end of 2009, weighing on domestic consumption and the retail sector.

"I think we may need, in fact, a fiscal stimulus some time early next year or before the end of this year," he told reporters after delivering a speech at the event.

"It might be in the US$200 billion to US$250 billion range -- not too small, not too big," he added.

If the next stimulus is too large, Roubini warned, financial markets would start to get worried about U.S. fiscal sustainability, with "severe" negative consequences for bond markets.

Roubini expects developing economies will have a sub-par recovery during the next couple of years, while emerging countries are in better shape to exit the recession faster.

After 10 years of sound macroeconomic policies and reduction in public debt levels, he noted, many emerging economies were able to implement countercyclical policies for the first time, which will result in faster economic recovery.

"Today people are worrying more about sovereign risk in advanced economies than in emerging markets," Roubini said, calling it a "shift in paradigm."

Later Thursday Roubini issued a statement in order to clarify his views which were 'taken out of context,' he said.

“It has been widely reported today that I have stated that the recession will be over 'this year' and that I have 'improved' my economic outlook. Despite those reports - however – my views expressed today are no different than the views I have expressed previously. If anything my views were taken out of context," the statement said.

“I have said on numerous occasions that the recession would last roughly 24 months. Therefore, we are 19months into that recession. If, as I predicted, the recession is over by year end, it will have lasted 24 months with a recovery only beginning in 2010.  Simply put I am not forecasting economic growth before year’s end."

"If that recession were to be over by year end – as I have consistently predicted – it would have lasted 24 months and thus been three times longer than the previous two and five times deeper – in terms of cumulative GDP contraction – than the previous two. So, there is nothing new in my remarks today about the recession being over at the end of this year."

“I have also consistently argued – including in my remarks today - that while the consensus is that the US economy will go back close to potential growth by next year, I see instead a shallow, below-par and below-trend recovery where growth will average about 1% in the next couple of years when potential is probably closer to 2.75%.

“ There is a risk of a double-dip W-shaped recession toward the end of 2010, as a tough policy dilemma will emerge next year. On one side, early exit from monetary and fiscal easing would tip the economy into a new recession as the recovery is anemic and deflationary pressures are dominant. On the other side, maintaining large budget deficits and continued monetization of such deficits would eventually increase long-term interest rates (because of concerns about medium-term fiscal sustainability and because of an increase in expected inflation), thus leading to a crowding out of private demand."

“While the recession will be over by the end of the year the recovery will be weak given the debt overhang in the household sector, the financial system and the corporate sector. Now there is also a massive re-leveraging of the public sector with unsustainable fiscal deficits and public debt accumulation."

 

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