Roubini, who had predicted the collapse of the US housing market and global recession three years ago, believes that all’s still not well with the world economy even though the US has been in recession since the end of 2007. But unlike most other recessions, this one will be a protracted one, which is slated to last for a good 36 months.
With the world’s largest financial institutions having collapsed last year, the world’s financial system has suffered a cardiac arrest and the global economy is in a semi-comatose state. Despite billions of dollars being spent via stimulus and economic packages, the health of financial institutions is not getting better because US economic losses have touched almost $3.6 trillion, he said.
According to him, while the good news is that the International Monetary Fund is committed to not letting other large financial institutions go the Lehman Brothers way, the bad news is that the credit losses are so huge that it will be rather difficult for any upswing to result in a credible turnaround anytime soon. At present, $1.43 trillion will be required to recapitalise the ailing banking sector of the US, he said.
Roubini said if retail consumption is falling then corporates are saving cash and thereby curtailing capital expenditure and production. Consequently, job losses are mounting and people are not spending in fear. This has resulted in a vicious cycle and to end this, a collective response from the governments is required.
And if this was not bad enough, Roubini said that even if there is a recovery 12-18 months down the line, it will be warped by the supply side shocks. Commodity producers like oil producing countries have already cut down production. So expect oil prices to touch $100 as soon as the world economy begins to turn around. The only thing that can save the day is prudent and timely action by governments.
Careful if you own any municipal bonds…
Tags: global recession, Roubini, US housing market