Threat of double-dip recession rising: Don

NEW YORK: Professor Nouriel Roubini, the New York University don who predicted the financial crisis, said the chance of a double-dip recession is increasing because of risks related to ending global monetary and fiscal stimulus.

The global economy will bottom out in the second half of this year, Prof Roubini wrote in a Financial Times commentary yesterday.

The recession in the United States, Britain and some European countries will not be ‘formally over’ before the end of the year, while the recovery has started in nations such as China, France, Germany, Australia and Japan, he said.

Governments around the world have pledged about US$2 trillion (S$3 trillion) in stimulus measures amid the worst worldwide recession since the Great Depression.

US Federal Reserve chairman Ben Bernanke and other global policymakers have cautioned that the recovery is likely to be muted, indicating they would not soon remove all the stimulus injected into the financial system.

‘There are risks associated with exit strategies from the massive monetary and fiscal easing,’ Prof Roubini wrote. ‘Policymakers are damned if they do and damned if they don’t.’

Government and central bank officials may undermine the recovery and tip their economies back into ‘stagdeflation’ if they raise taxes, cut spending and mop up excess liquidity in their systems to reduce fiscal deficits, Prof Roubini said. He defines ‘stagdeflation’ as recession and deflation.

Those who maintain large budget deficits will be punished by bond market vigilantes, as inflationary expectations and yields on long-term government bonds rise and borrowing costs climb sharply, he wrote. That will, in turn, lead to stagflation, Prof Roubini said.

European Central Bank (ECB) officials led by president Jean-Claude Trichet are suggesting they will not rush to reverse their emergency stimulus amid mounting evidence of an economic recovery. The ECB has cut its benchmark interest rate to a record 1 per cent and is buying covered bonds and flooding banks with money.

‘We see some signs confirming that the real economy is starting to get out of the period of free fall,’ Mr Trichet said at the Fed’s annual symposium in Jackson Hole, Wyoming, last Saturday. This ‘does not mean at all that we do not have a very bumpy road ahead of us’.

When needed, the ECB will implement a ‘credible exit strategy’ from its crisis policies, Mr Trichet said.

The US must address the massive amounts of ‘monetary medicine’ that have been pumped into the financial system and now pose threats to the economy and the dollar, billionaire Warren Buffett said last week.

Prof Roubini expects a U-shaped recovery, where growth will be ‘anaemic and below trend for at least a couple of years’, he said.

A full global recovery from the current recession may take two years or more, Nobel laureate Paul Krugman said earlier this month.

Rising unemployment, a global financial system that is still ‘severely damaged’ and weak corporate profitability are among reasons why any recovery will not be V-shaped, Prof Roubini said.

BLOOMBERG