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Is
the world economy having a 2008 moment?
Nouriel Roubini
Wednesday 2 March
2016 14.11 GMT
Two dismal months
for financial markets may give way in March to a relief rally for
assets such as global equities
The question I am
asked most often nowadays is this: are we back to 2008 and another
global financial crisis and recession?
My answer is a
straightforward no, but that the recent episode of global financial
market turmoil is likely to be more serious than any period of
volatility and risk-off behaviour since 2009. This is because there
are now at least seven sources of global tail risk, as opposed to the
single factors – the eurozone crisis, the Federal Reserve “taper
tantrum,” a possible Greek exit from the eurozone, and a hard
economic landing in China – that have fuelled volatility in recent
years.
First, worries about
a hard landing in China and its likely impact on the stock market and
the value of the renminbi have returned with a vengeance. While China
is more likely to have a bumpy landing than a hard one, investors’
concerns have yet to be laid to rest, owing to the ongoing growth
slowdown and continued capital flight.
Second, emerging
markets are in serious trouble. They face global headwinds (China’s
slowdown, the end of the commodity super cycle, the Fed’s exit from
zero policy rates). Many are running macro imbalances, such as twin
current account and fiscal deficits, and confront rising inflation
and slowing growth. Most have not implemented structural reforms to
boost sagging potential growth. And currency weakness increases the
real value of trillions of dollars of debt built up in the last
decade.
Third, the Fed
probably erred in exiting its zero-interest-rate policy in December.
Weaker growth, lower inflation (owing to a further decline in oil
prices), and tighter financial conditions (via a stronger dollar, a
corrected stock market, and wider credit spreads) now threaten US
growth and inflation expectations.
Fourth, many
simmering geopolitical risks are coming to a boil. Perhaps the most
immediate source of uncertainty is the prospect of a long-term cold
war – punctuated by proxy conflicts – between the Middle East’s
regional powers, particularly Sunni Saudi Arabia and Shia Iran.
Fifth, the decline
in oil prices is triggering falls in US and global equities and
spikes in credit spreads. This may now signal weak global demand –
rather than rising supply – as growth in China, emerging markets,
and the US slows.
Weak oil prices also
damage US energy producers, which comprise a large share of the US
stock market, and impose credit losses and potential defaults on net
energy exporting economies, their sovereigns, state-owned
enterprises, and energy firms. As regulations restrict market makers
from providing liquidity and absorbing market volatility, every
fundamental shock becomes more severe in terms of risk-asset price
corrections.
Sixth, global banks
are challenged by lower returns, owing to the new regulations put in
place since 2008, the rise of financial technology that threatens to
disrupt their already-challenged business models, the growing use of
negative policy rates, rising credit losses on bad assets (energy,
commodities, emerging markets, fragile European corporate borrowers),
and the movement in Europe to “bail in” banks’ creditors,
rather than bail them out with now-restricted state aid.
Finally, the
European Union and the eurozone could be ground zero of global
financial turmoil this year. European banks are challenged. The
migration crisis could lead to the end of the Schengen Agreement, and
(together with other domestic troubles) to the end of German
chancellor Angela Merkel’s government.
Moreover, Britain’s
exit from the EU is becoming more likely. With the Greek government
and its creditors once again on a collision course, the risk of
Greece’s exit may return. Populist parties of the right and the
left are gaining strength throughout Europe. Thus, Europe
increasingly risks disintegration. To top it all off, its
neighborhood is unsafe, with wars raging not only in the Middle East,
but also – despite repeated attempts by the EU to broker peace –
in Ukraine, while Russia is becoming more aggressive on Europe’s
borders, from the Baltics to the Balkans.
In the past, tail
risks were more occasional, growth scares turned out to be just that,
and the policy response was strong and effective, thereby keeping
risk-off episodes brief and restoring asset prices to their previous
highs (if not taking them even higher). Today, there are seven
sources of potential global tail risk, and the global economy is
moving from an anemic expansion (positive growth that accelerates) to
a slowdown (positive growth that decelerates), which will lead to
further reduction in the price of risky assets (equities,
commodities, credit) worldwide.
At the same time,
the policies that stopped and reversed the doom loop between the real
economy and risk assets are running out of steam. The policy mix is
suboptimal, owing to excessive reliance on monetary rather than
fiscal policy. Indeed, monetary policies are becoming increasingly
unconventional, reflected in the move by several central banks to
negative real policy rates; and such unconventional policies risk
doing more harm than good as they hurt the profitability of banks and
other financial firms.
Two dismal months
for financial markets may give way in March to a relief rally for
assets such as global equities, as some key central banks (the
People’s Bank of China, the European Central Bank, and the Bank of
Japan) ease more, while others (the Fed and the Bank of England) will
remain on hold for longer. But repeated eruptions from some of the
seven sources of global tail risk will make the rest of this year –
unlike the previous seven – a bad one for risky assets and anaemic
for global growth.
• Nouriel Roubini,
a professor at NYU’s Stern school of business and chairman of
Roubini Global Economics
Copyright: Project
Syndicate, 2016
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'Gathering
storm' for global economy as markets lose faith
The
Bank of International Settlements warns that trouble has been brewing
‘a long time’ but central bank options are dwindling
Agence France-Presse
Monday 7 March 2016
05.37 GMT
A fragile calm in
global financial markets has given way to all-out turbulence, the
Bank of International Settlements has said, warning of a “gathering
storm” which has long been brewing.
In its latest
quarterly report, watched closely by investors, the BIS – which is
known as the central bank of central banks – also warned that
investors were concerned governments around the world were running
out of policy options.
BIS chief Claudio
Borio said the “uneasy calm” of previous months had given way to
turbulence and a “gathering storm”.
“The tension
between the markets’ tranquillity and the underlying economic
vulnerabilities had to be resolved at some point. In the recent
quarter, we may have been witnessing the beginning of its
resolution,” he added.
“We may not be
seeing isolated bolts from the blue, but the signs of a gathering
storm that has been building for a long time,” he warned.
Although Asian
markets enjoyed another broadly positive day on Monday and continued
to claw back the losses of January, the report said said that
investors were concerned about what central banks could do in the
event of another crisis.
“Underlying some
of the turbulence was market participants’ growing concern over the
dwindling options for policy support in the face of the weakening
growth outlook,” the report said. “With fiscal space tight and
structural policies largely dormant, central bank measures were seen
to be approaching their limits.”
Borio surveyed the
major disruptions over the last three months, from the first
post-crisis interest rate hike by the US Federal Reserve in December,
to accumulating signs of China’s slowdown.
In what he termed
the second phase of turbulence in the last quarter, Borio said
markets were plagued by fears about the health of global banks and
the Bank of Japan’s shock decision to impose negative policy rates.
Persistently weak
oil prices drove turbulence throughout the quarter, he said.
Seeking to find a
common threat for the various global trends at play, Borio said “debt
is what helps us understand apparently unrelated developments”.
“Against the
backdrop of a long-term, crisis-exacerbated decline in productivity
growth, the stock of global debt has continued to rise and the room
for policy manoeuvre has continued to narrow,” he said.
Public sector debt
has risen broadly, while private sector debt rises have been
concentrated in emerging markets, he added.
He argued that debt
also offered a “hint” on the continuing weakness of oil prices as
“highly indebted oil-producing firms come under pressure to keep
the spigots open to meet their service burdens.”
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