Nouriel Roubini’s star quality has not diminished a bit, even two years after the onset of the global financial crisis which he saw coming long before others did.  The Harvard-educated, New York University professor, who shot to fame after correctly predicting the subprime crisis three years before it actually happened, was in Hong Kong as a speaker at the Asian Financial Forum organized by the Hong Kong government on January 20-21.

 

In a departure from his previous pessimistic predictions which earned him the “Dr Doom” tag, Roubini spread some hope early in his speech when he said that the worst was over for the global economy, and it was at the beginning stage of a recovery. “There is some good news, and the good news is that there is now light at the end of the tunnel after the severe US and global economic recession and financial crisis,” he said. “The free fall has stopped; we are starting to see the bottoming out in the global economy. The credit goes to policy-makers for having done the right thing for the time being, even if the long-term consequences of the easy monetary and fiscal policy are still left to deal with.”

 

He cautioned that the recovery in the US and other advanced economies was going to be more “sub-par, below trend, anaemic: U-shaped rather than V-shaped”. In the US and other overspending countries – if the consumption growth is less than GDP growth – since consumption is 70% of GDP, GDP growth is going to slow down unless other components of the GDP grow faster than the GDP, he said.

 

According to Roubini, the growth-conducive fiscal policies that governments adopted last year will no longer be effective in stimulating economies from the second half of this year. “Given unchanged fiscal policies, the effect of the fiscal policy on growth is going to be negative in the second half of this year. It will become a drag on economic growth in the US, Europe and Japan,” he says.

 

“If policy makers were to respond to this fiscal drag by more fiscal spending, reducing tax further and increasing budget deficits, the bond market vigilantes that have already woken up in Greece, Iceland and the UK will eventually start to worry in the US, Japan and other countries about the runaway fiscal deficits that could push up the long-term interest rates higher and crowd out the recovery. So we cannot rely on the public sector to stimulate the economy; eventually the baton of demand has to move to the private sector.”

 

On the other hand, Roubini was more bullish in China and other emerging Asian countries. “Growth is going to be robust in China, Hong Kong and throughout the rest of emerging Asia – more like a V rather than U,” he predicts. “This is because the potential growth rate is much higher in emerging economies than advanced economies – 5% to 8%. Excluding Central Asia and Eastern Europe, most of these emerging markets do not have the kind of leverage in the financial system and the housing markets that became the problem of the US.”

 

He added that China, as a nation of big savers and less spenders, can help itself and emerging Asia, and help commodities exporters, but it cannot be the only engine of global economic growth. In fact, he said, it is necessary that China and other emerging economies start tightening their monetary system now to avoid overheating, even if these policy actions lead to a short-term market reaction.