There is a 40 percent chance of a double dip recession in the United States and some other advanced countries, according to Nouriel Roubini, chairman of Roubini Global Economics and a New York University professor. He cautioned against reading too much into recent improvements in economic indicators for Eurozone countries, quipping that “people are getting cheerful, but the best is behind us.” Mark Zandi, chief economist of Moody’s Analytics, matched Roubini in gloom about the near-term outlook, putting the odds of a double dip recession in the United States at 1 in 3.
Both gave credit to governments for policies followed during the Great Recession of 2007-09, in the absence of which they said the outlook would have been much worse. Roubini praised the collective action by G-20 policymakers in easing monetary and fiscal policies, adding that it showed policymakers had learned the lessons from the Great Depression and the Lost Decade in Japan. Zandi said that the U.S. fiscal stimulus “did exactly what it was supposed to do—end the recession.”
Despite these policy successes, though, the problems that precipitated the Great Recession were severe enough that the growth outlook for most advanced countries remains tepid. Governments are running out of policy options to keep stimulating the economy, Roubini said. And while emerging market economies were in better shape, these economies are not yet powerful enough to act as a locomotive for growth in the advanced countries. Zandi added that the growth expected in the near term is “not going to be enough to forestall increases in unemployment” in advanced economies; he predicted that the U.S. unemployment rate would be back in the double digits over the next few months.
What could be done to improve the outlook? Roubini and Zandi agreed that a robust recovery would not take place until households, particularly in the U.S., are able to reduce their mortgage debt burdens and establish a more secure financial footing. Roubini said a nationwide write-down of mortgages would be preferable to cumbersome case-by-case loan modifications which would clog up bank offices and bankruptcy courts for years. Banks could be partially compensated for the write-down by warrants that would give them a share of profits from any eventual sale of the homes.
In some countries, it was not just the household sector but governments that needed a debt write-down, Roubini said. While the situation in Greece and other economies was being patched together for the time being with the help of the European Union and the IMF, he worried that in the event of further shocks, “there won’t be someone from Mars coming to bail out the IMF or the EU.”
Despite sharing Roubini’s gloom over the near term prospects, Zandi held out hope that U.S. prospects would get better by 2012. He pointed to two reasons for hope. First, households are slowly but surely cutting back on debt, and setting the stage for when they will feel comfortable enough to spend again. Second, corporate profits are surging and these have historically been a good predictor of job growth. He predicted that U.S. real GDP growth would be 5% in 2012.
Zandi’s bold prediction carries on a tradition of top economists going out on a limb in their talks at the IMF on the economic outlook. Last week’s talk comes four years after a now-prophetic talk by Nouriel Roubini in which he concluded:
“my view is that the risk of a hard landing is very high for the U.S. economy. I see essentially a recession coming by next year. I give it a very high likelihood. I argue that housing today, like the tech bust in 2000-2001, will have a macro effect; it is not going to be just a sectoral effect. I argue that U.S. consumers are now close to a ‘tipping over’ point given all the vulnerabilities I have discussed. I argue that the Fed easing will occur, so the next move is going to be a cut, but it is not going to prevent a recession. And, finally, I argue that the rest of the world is not going to be able to decouple from the U.S. even if it is not going to experience an outright recession like the United States. So on that cheerful note, I will stop.”
If U.S. growth in 2012 turns out to be 5%, Zandi will surely be invited back to the IMF to do a victory lap (see his presentation).
Nouriel Roubini signing a copy for Prakash Loungani (Photo: Michael Spilotro/IMF)
To see the video of the event, click here.