Dr. Doom sees risk of a double-dip recession

You weren't expecting an all-clear message from one of the world's most cautious economists, were you?

Nouriel 'Dr. Doom' Roubini, the New York University professor who two years ago predicted the global financial crisis, said the risk of a double-dip recession for the global economy is rising due to the decline in monetary and fiscal stimulus.

In a op-ed column in The Financial Times, Roubini forecast that the global economy will bottom in the second half of 2009. The recession will not end in the U.S., U.K., and in selected other European countries before the end of the year, he said, adding that the recovery has already started in China, France, Germany, Australia, and Japan.
"There are risks associated with exit strategies from the massive monetary and fiscal easing," Roubini wrote. "Policy makers are damned if they do and damned if they don't."

Central bankers and policy makers in the world's major economies have committed more than $2 trillion in monetary stabilization and fiscal stimulus to cope with the worst global recession since the Great Depression. In a speech delivered at the Kansas City Fed's annual weekend symposium in Jackson Hole, Wyoming, U.S. Federal Reserve Chairmen Ben Bernanke cautioned that the recovery is likely to be muted, adding that the central bank would not soon remove all stimulus added to stabilize financial markets.

Policy makers between a rock and a hard place

Further, as his moniker implies, Roubini, is not one to sugar-coat analyses, predicting that policy makers will likely to face one of two difficult choices.

If they remove monetary stabilization and stimulus funds too soon, central bank and government officials may undermine the recovery and tip their economies into a condition he called 'stagdeflation' - a recession with deflation.

On the other hand, if they maintain large and in some cases unprecedented budget deficits, nations will be punished by bond market vigilantes and inflation hawks, with rising inflation expectations pushing long-term government bond interest rates significantly higher, Roubini wrote, which will lead to stagflation - a recession with inflation.

The most likely economic track, according to Roubini's analysis? A U-shaped recovery, with growth "anemic and below-trend for at least a couple of years," he wrote. Rising unemployment, a global economy that's been altered by the financial crisis, and weak corporate profits are among the reasons why the recovery won't be V-shaped, or strong, Roubini said.

Also, energy prices, particularly oil, are rising faster than justified by economic fundamentals, and could substantially hurt global growth, he said. He said last year's $145 oil price was the tipping point for the global economy in terms of disposable income for oil importing countries and trade. "The global economy could not withstand another contractionary shock if similar speculation drives oil rapidly toward $100 a barrel," Roubini said. Oil traded up 10 cents early Monday to $72.74 per barrel.

Economic Analysis: Lest any investor become giddy about the size of the recovery, we have economist Roubini to take the mood in the room down a notch, as he 'did not disappoint with his sobering analysis.'

Even so, the forecast could prove to be beneficial, if policy makers heed Roubini's analysis and warnings. First, central bankers should withdraw stimulus slowly: in the case of the United States, only after its economic recovery has gained traction. Second, Roubini's analysis underscored the need for emerging market nations to create engines of growth in their economies via increasing domestic demand: the United States, due to high unemployment, will likely to be the caboose, not the engine of growth in this recovery. Finally, measures must be taken to remove speculation from oil markets. Roubini noted the impact speculators and flavor-of-the-month asset chasers will have on the global economy: they'll hurt it substantially, if oil continues to trek toward $100 per barrel.
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