Nouriel Roubini's "Good, Bad, & Ugly" Scenarios For The Global Economy

Authored by Nouriel Roubini via Project Syndicate,

The International Monetary Fund, which in recent years had characterized global growth as the “new mediocre,” recently upgraded its World Economic Outlook. But is the IMF right to think that the recent growth spurt will continue over the next few years, or is a temporary cyclical upswing about to be subdued by new tail risks?

For the last few years, the global economy has been oscillating between periods of acceleration (when growth is positive and strengthening) and periods of deceleration (when growth is positive but weakening). After over a year of acceleration, is the world headed toward another slowdown, or will the recovery persist?

The current upswing in growth and equity markets has been going strong since the summer of 2016. Despite a brief hiccup after the Brexit vote, the acceleration endured not just Donald Trump’s election as US president, but also the heightening policy uncertainty and geopolitical chaos that he has generated. In response to this apparent resilience, the International Monetary Fund, which in recent years had characterized global growth as the “new mediocre,” recently upgraded its World Economic Outlook.

Will the recent growth spurt continue over the next few years? Or is the world experiencing a temporary cyclical upswing that will soon be subdued by new tail risks, like those that have triggered other slowdowns in recent years? It is enough to recall the summer of 2015 and early 2016, when investor fears of a Chinese hard landing, an excessively fast exit from zero policy rates by the US Federal Reserve, a stall in US GDP growth, and low oil prices conspired to undercut growth.

One can envision three possible scenarios for the global economy in the next three years or so.

In the bullish scenario, the world’s four largest, systemically important economies – China, the eurozone, Japan, and the United States – implement structural reforms that boost potential growth and address financial vulnerabilities.

By ensuring that the cyclical upswing is associated with stronger potential and actual growth, such efforts would produce robust GDP growth, low but moderately rising inflation, and relative financial stability for many more years. US and global equity markets would reach new heights, justified by stronger fundamentals.

In the bearish scenario, the opposite happens: the world’s major economies fail to implement structural reforms that boost potential growth. Rather than using this month’s National Congress of the Communist Party as a catalyst for reform, China kicks the can down the road, continuing on a path of excessive leverage and overcapacity. The eurozone fails to achieve greater integration, while political constraints limit national policymakers’ ability to implement growth-enhancing structural reforms. And Japan remains stuck on its low-growth trajectory, as supplyside reforms and trade liberalization – the third “arrow” of Prime Minister Shinzo Abe’s economic strategy – fizzle out.

As for the US, the Trump administration, in this scenario, continues to pursue a policy approach – including a tax cut that overwhelmingly favors the rich, trade protectionism, and migration restrictions – that may well reduce potential growth. Excessive fiscal stimulus leads to runaway deficits and debt, which results in higher interest rates and a stronger dollar, further weakening growth. Trigger-happy Trump could even end up in a military conflict with North Korea – and, later, Iran – diminishing America’s economic prospects further.

In this scenario, the lack of reform in major economies will leave the cyclical upswing constrained by low trend growth. If potential growth remains low, easy monetary and credit policies could eventually lead to goods and/or asset inflation, eventually causing an economic slowdown – and possibly an outright recession and financial crisis – when asset bubbles burst or inflation rises.

The third – and, in my view, most likely – scenario lies somewhere between the first two. The cyclical upswing, in both growth and equity markets, continues for a while, driven by the remaining tailwinds. Yet, while major economies pursue some structural reforms to improve potential growth, the pace of change is much slower, and its scope more modest, than is needed to maximize potential.

In China, this muddle-through scenario means doing just enough to avoid a hard landing, but not enough to achieve a truly soft one; with financial vulnerabilities left unaddressed, distress becomes all but inevitable over time. In the eurozone, this scenario would entail only nominal progress toward greater integration, with Germany’s continued rejection of true risk-sharing or fiscal union weakening incentives for struggling member countries to undertake tough reforms. In Japan, an increasingly ineffective Abe administration would implement minimal reforms, leaving potential growth stuck below 1%.

In the US, Trump’s presidency would remain volatile and ineffective, with a growing number of Americans realizing that, despite his populist pretense, Trump is merely a plutocrat protecting the interests of the rich. Inequality rises; the middle class stagnates; wages barely grow; and consumption and growth remain anemic, at barely close to 2%.

But the risks of muddling through extend far beyond mediocre economic performance. This scenario represents not a stable equilibrium, but an unstable disequilibrium, vulnerable to economic, financial, and geopolitical shocks. When such shocks eventually emerge, the economy will be tipped into a slowdown or, if the shock is large enough, even recession and financial crisis.

In other words, if the world does simply muddle through, as seems likely, it could, within three or four years, face a more bearish outlook.

The lesson is clear: either political leaders and policymakers demonstrate the leadership needed to secure a better medium-term outlook, or downside risks will materialize before long – and do serious damage to the global economy.


Jim in MN Cash2Riches Tue, 10/10/2017 - 12:10 Permalink

I think this point of view needs to be refined a bit.  What everyone is missing at the moment is a stunning outbreak of global peace.  Could it last, and be accompanied by prosperity?  Sure it could.  I mentioned this to an Indian economist last week and she smiled and said "Oh yes, that's been happening for some time now." At the same time, the displacement of the West is entirely consistent.  The USA doesn't need Eurasia except as a trading partner.  Forget about energy security, the need for imperial bases everywhere, all of that.  That is over already. So here is the rub--the elites DO NOT WANT the peace part of the equation.  They want war, and bases, and dead babies.  Badly.  It's all Clinton, McCain and their globalist Deep State pervert traitor club dreams about.  That and money and power.  All the same thing really.So--work with me here--if the people experiencing all this peace, entire continents now with NO hot wars at all, for the first time in generations--actually NOTICE it, what then?A shining populist moment of NO MAS?What if............

In reply to by Cash2Riches

JibjeResearch Tue, 10/10/2017 - 12:21 Permalink

Fuck me..... I'm not a PhD theorist..., but I think all people got this one right just like him.A hard reccession or a full growth, or something in between....Man .... we the people are so smart....  

JBPeebles Tue, 10/10/2017 - 14:16 Permalink

Europe isn't sliding towards greater integration. It's the unelected bureaucrats in Brussels that are seeking integration. The Germans are positioned to benefit as the Eurozone's greatest exporter. Meanwhile Catalonia is seceeding from Spain and have been cautioned by the French. Hardly sounds like integration is on the table, disintegration more likely, at least politically. And the new Marxist regime in Greece is going to make some changes.So if the EU is better together then separated it is worse? With government debt levels so high, not sure how the PIGS benefit from the status quo. The political consequences of growing inequity may imperil the precious fragility of the system rather than perpetuate perpetual benefit.Now if you're famous and paid well enough to speak in front of wealthy financial types and their corporations, your perspective on European integration may tend more towards the economic rather than the political. Isn't that so, Dr. Doom?Looks like the Muslim immigrants have torn Sweden apart. Even Merkel now says enough have been admitted. Economic benefit=introducing new workers and taxpayers to a rapidly aging populace. Political liability=Right-wing parties ascend due to legitimate anti-migration views borne out in the skyrocketing levels of crime playing out in the streets below, far from the EU's well fortified bureacratic enclaves and layered away by presidential security details.So there's more to money in this world. And as long as the voting systems are compromised (hmmm, that gives me an idea...) then the people will have their say. And if you've been raped or robbed by Units of Human Garbage then you're probably really pissed with your government's--and the EU's--position on immigration.My guess is that the globalist target is the safety net. Scandinavian countries consistently perform(-ed ?) the best in surveys of life satisfaction. Can't have that no sir, decimating middle class living standard is what the globalists do. So they found a way to rip at Europe's cultural heritage and defile the Continent so they're all in the Third World now.Safety net overloaded, health system tattered perhaps the migrants simply accelerated a much slower rate of economic decline that was going to happen anyway. I mean if your society isn't breeding, how can employees cover the retired and the safety net be preserved? If everyone is too old, the economies stagnate like Japan's. And obviously the standard of living--for the public--is secondary to the economic considerations of the unelected bureaucrats in Brussels whom I am told are quite well paid.Even Germany has gone too far in accepting the alien culture that the immigrant horde brings. Their continent will become majority Muslim and women will be subjugated to the status of inferiority brought by their families to be inflicted through rituals like FGM and burqa-wearing in the streets of the once Enlightened continent that now loses what noble traditions they had. Non-Eurozone countries like Hungary and Bulgaria know full well the threat Islamification brings and have sealed their borders, raising the ire of Germans and the EU bureaucrats who demand they receive the Muslim and African filth.Stabbings and public acts of terrorism come in the horde's wake and no women are safe. Time for Europeans to shed the EU globalist monstrosity, ban immigration, and protect their countries. This has made the Continent as special place and those who destroy it deserve a place in Hell. 

Hkan Tue, 10/10/2017 - 14:38 Permalink

What If "political leaders and policymakers leadership" agenda is 100%, 1%?This is current direction....nothing gonno change that! Not one single sign as faar as I see.....wasnt expecting either...