Roubini: 10 Reasons The Recovery Will Be U-Shaped
In an email to Roubini Global Economic's clients, he predicts that the economy will recover in a U-Shape. His forecast is in line with Goldman Sachs, who also recently predicted that "gradually is the watch word and a V-shaped recovery remains unlikely."
A V-shape recovery might be visible in Q3 private consumption rates, which grew a healthy 3.4%, in line with consumption rates before the crisis. But this was just a head-fake, according to Roubini, thanks to cash-for-clunker type programs and home buyer tax credits. He thinks consumption will now slow, growing at just 1.8% in 2010.
Predictions of a slowing recovery could weaken the dollar and spur inflation, but Roubini doesn't think that is necessarily a bad thing. If inflation is controlled, it could help us pay back our foreign debt obligations faster. So a gradual, U-shape recovery with mild inflation could benefit the U.S.'s bottom line.
RGE's 10 Reasons Why We Will See A U-Shape Recovery:
1. A U-Shaped U.S. Consumer. Roubini argues against a "V-Shaped" recovery, which he says puts too much confidence in this year's strong equity rally. 80% of the population reacts to home prices, not equity prices, and he forecasts that home prices will fall further.
2. Difficult Labor Market Conditions. Expect a strong second half of 2009 and a sluggish 2010 with growth below potential and continued job losses.
3. Balance Sheet Recession Caused By Over-leverage And Debt Accumulation. There are signs of a massive re-leveraging in the public sector. The cost of maintaining this level of debt will be very high and a drag on the economy.
4. Investment Usually Is A Strong Recovery Component. But investment will not recover while one third of current capacity is not utilized.
5. A Damaged Financial System And The Related Credit Crunch. Only half of the estimated $3 trillion global credit losses (IMF recently lowered their estimates) have been recognized so far. Expect more to come, especially in Europe.
6. Home Prices Said To Fall Further And Commercial Real Estate Bust Continuing.
7. Exit Strategy: Damned If You Do And Damned If You Don't. Removing fiscal accommodation will constrain a recovery that still appears weak. It has already been determined that it is too early to remove fiscal accommodation, but if it continues it will fuel persistent large budget deficits and lead to inflation.
8. Fall In Potential GDP Levels and Possibly In Potential Growth
9. Global Imbalances: Over-Spenders Retrench While Over-Savers Don't Compensate. Fall in demand from countries that tend to be over-spenders (US, UK) has not been neutralized by countries that tend to be over-savers (Japan, Germany).
10. Emerging Markets Fared Better But Can't Close The Consumption Gap. Can China/India be the engine of global growth? No. Can EMs decouple from anemic growth in G3? No. Is the policy response of China/Asia appropriate and sustainable? No. There are not the necessary social safety nets in EM countries, so the motive to save high. Private demand has to take over and drive growth.