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Commentary: Is the global economy finally turning the corner?

Financial markets have become giddy. US and other equities are trending toward new highs, and there is even talk of a potential “melt-up” in equity values, says NYU's Nouriel Roubini.

Commentary: Is the global economy finally turning the corner?

A woman points to an electronic board showing stock prices at the Tokyo Stock Exchange (TSE) on Jan 4, 2019. (File photo: REUTERS/Kim Kyung-Hoon)

NEW YORK CITY:  This past May and August, escalations in the trade and technology conflict between the United States and China rattled stock markets and pushed bond yields to historic lows.

But that was then. Since then, financial markets have once again become giddy. US and other equities are trending toward new highs, and there is even talk of a potential “melt-up” in equity values.

The financial-market buzz has seized on the possibility of a “reflation trade,” in the hope that the recent global slowdown will be followed in 2020 by accelerating growth and firmer inflation (which helps profits and risky assets).


The sudden shift from risk-off to risk-on reflects four positive developments. First, the US and China are likely to reach a “phase-one” deal that would at least temporarily halt any further escalation of their trade and technology war.

READ: Commentary: The problem with a Phase One US-China trade deal

Second, despite the uncertainty surrounding the United Kingdom’s election on Dec 12, Prime Minister Boris Johnson has at least managed to secure a tentative “soft Brexit” deal with the EU, and the chances of the UK crashing out of the bloc have been substantially reduced.

Third, the US has demonstrated restraint in the face of Iranian provocations in the Middle East, with President Donald Trump realising that surgical strikes against that country could result in a full-scale war and severe oil-price spike.

And, lastly, the US Federal Reserve, the European Central Bank, and other major central banks have gotten ahead of geopolitical headwinds by easing monetary policies. 

READ: Commentary: Can the RCEP save the Singapore economy?

The US Fed Chair Janet Yellen. (File photo: AFP/KAREN BLEIER) US President Donald Trump has not publicly ruled out re-nominating current Fed Chair Janet Yellen to a second four-year term, but US media have reported that Jerome Powell, a current Fed governor, is the likely candidate AFP/KAREN BLEIER READ: Commentary: Fears of a financial crisis around corner drive US Fed's rate cuts With central banks once again coming to the rescue, even minor “green shoots” – such as the stabilisation of the US manufacturing sector and the resilience


Yet there is much to suggest that not all is well with the global economy. For starters, recent data from China, Germany, and Japan suggest that the slowdown is still ongoing, even if its pace has become less severe.

Second, while the US and China may agree to a truce, the ongoing decoupling of the world’s two largest economies will almost certainly accelerate again after the US election next November.

In the medium to long term, the best one can hope for is that the looming cold war will not turn hot.

Third, while China has shown restraint in confronting the popular uprising in Hong Kong, the situation in the city is worsening, making a forceful crackdown likely in 2020.

Among other things, a militarised Chinese response could derail any trade deal with the US and shock financial markets, as well as push Taiwan in the direction of forces supporting independence – a red line for Beijing.

A Huawei company logo is pictured at the Shenzhen International Airport in Shenzhen, Guangdong province, China. (File photo: REUTERS/Aly Song)

READ: Commentary: This may be the end of Hong Kong as we know it

Fourth, although a “hard Brexit” may be off the table, the eurozone is experiencing a deepening malaise that is not related to the UK’s impending departure. Germany and other countries with fiscal space continue to resist demands for stimulus. 

Worse, the ECB’s new president, Christine Lagarde, will most likely be unable to provide much more in the way of monetary-policy stimulus, given that one-third of the ECB Governing Council already opposes the current round of easing.

READ: Commentary: Germany has one of the highest trade surpluses in the world. That’s a big problem

Beyond challenges stemming from an aging population, weakening Chinese demand, and the costs of meeting new emissions standards, Europe also remains vulnerable to Trump’s oft-repeated threat to impose import tariffs on German and other European cars.

And key European economies – not least Germany, Spain, France, and Italy – are experiencing political ructions that could translate into economic trouble.

Germany routinely comes under fire for its massive trade surplus. (File photo: AFP/CHRISTIAN CHARISIUS)

Fifth, with crippling US-led sanctions now fueling street riots, the Iranian regime will see no other choice but to continue fomenting instability in the wider region, in order to raise the costs of America’s current approach.

The Middle East is already in turmoil. Massive protests have erupted in Iraq and Lebanon, a country that is effectively bankrupt and at risk of a currency, sovereign-debt, and banking crisis.

In the current political vacuum there, the Iranian-backed Hezbollah could decide to attack Israel. Turkey’s incursion into Syria has introduced many new risks, including to the supply of oil from Iraqi Kurdistan.

Yemen’s civil war has no end in sight. And Israel is currently without a government. The region is a powder keg; an explosion could trigger an oil shock and a renewed risk-off episode.

READ: Commentary: Israel is on the cusp of a new era

Sixth, central banks are reaching the limits of what they can do to backstop the economy, and fiscal policy remains constrained by politics and high debts.

To be sure, policymakers could turn to even more unconventional policies – namely, monetised fiscal deficits – whenever another downturn occurs, but they will not do so until the next crisis is already severe.

Benny Gantz, head of Blue and White party, holds hands with his party candidates Yair Lapid, Moshe Yaalon and Gaby Ashkenazi, as they react to exit polls in Israel's parliamentary election at the party headquarters in Tel Aviv, Israel April 10, 2019. (File photo: REUTERS/Amir Cohen)

Seventh, the populist backlash against globalisation, trade, migration, and technology is worsening in many places. In a race to the bottom, more countries may pursue policies to restrict the movement of goods, capital, labor, technology and data.

While recent mass protests in Bolivia, Chile, Ecuador, Egypt, France, Spain, Hong Kong, Indonesia, Iraq, Iran, and Lebanon reflect a variety of causes, all are experiencing economic malaise and rising political resentment over inequality and other issues.


Eighth, the US under Trump may become the biggest source of uncertainty. Trump’s “America First” trade foreign policies risk destroying the international order that the US and its allies created after World War II.

READ: Commentary: The US that no longer bothers about diplomacy

Some in Europe – like French President Emmanuel Macron – worry that NATO is now comatose, while the US is provoking rather than supporting its Asian allies, such as Japan and South Korea.

In the US, the impeachment process will lead to even more bipartisan gridlock and warfare, and some Democrats running for the party nomination have policy platforms that are making financial markets nervous.

US President Donald Trump heads to the Marine One helicopter to depart the White House on his way to address the Conservative Political Action Conference (CPAC) in Washington, U.S., February 23, 2018. (File photo: REUTERS/Jim Bourg) FILE PHOTO: U.S. President Donald Trump heads to the Marine One helicopter to depart the White House on his way to address the Conservative Political Action Conference (CPAC) in Washington, U.S., February 23, 2018. REUTERS/Jim Bourg​​​​​​​

READ: Commentary: US House didn't need to pass impeachment process but did. Here's why

READ: Commentary: Don’t hold breath (yet) for Trump's conviction or removal

Finally, medium-term trends may cause still more economic damage and disruption: Demographic aging in advanced economies and emerging markets will inevitably reduce potential growth, and restrictions on migration will make the problem worse.

Climate change is already causing costly economic damage as extreme weather events become more frequent, virulent, and destructive.

And while technological innovation may expand the size of the economic pie in the long run, artificial intelligence and automation will first disrupt jobs, firms, and entire industries, exacerbating already high levels of inequality.

Whenever the next severe downturn occurs, high and rising private and public debts will prove unsustainable, triggering a wave of disorderly defaults and bankruptcies.

The disconnect between financial markets and the real economy is becoming more pronounced. Investors are happily focusing on the attenuation of some short-term tail risks, and on central banks’ return to monetary-policy easing.

But the fundamental risks to the global economy remain. In fact, from a medium-term perspective, they are actually getting worse.

Nouriel Roubini is Chairman of Roubini Macro Associates and Professor of Economics at New York University’s Stern School of Business


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