BAHRAIN: Nouriel Roubini, the economist who famously predicted the global financial crisis of 2008, believes the world is heading toward an era of the “new mediocre” where weakened growth will be the norm — but that it will avoid an imminent global recession.
Speaking to Arab News on the sidelines of the Top CEO Forum in Bahrain, Roubini said that the “synchonized slowdown” many economists have detected would not lead to a financial crash — as some pessimists have predicted — or at least, not yet.
“I do not see another global financial crisis in the next year or so, but eventually there will be a global recession. If and when that occurs is a very open question, but it’s not over the near horizon,” he said.
“The risk of synchronized growth slowdown is real, in the US, in China, in Europe and all over the world, but the question is whether the growth could stall and then lead to an outright recession.
“In my view that is unlikely. The bad news is that there is a slowdown. The good news is that we’re not going have a global recession, for several reasons. I was recently in China where there is another round of macro-stimulus. You’ll see in the next few quarters growth in China closer to their official target of above 6 percent.”
Roubini, who told an audience at the Forum that he would rather be known as “Dr. Realist” than by the “Dr. Doom” tag he earned in the run up to the 2008 global financial crisis, was more optimistic on world trade.
“I think that both President (Donald) Trump and President Xi (Jinping) need a trade deal, so they’ll reach an agreement. Trump will declare victory whatever deal they reach, and markets have been nervous about the risk of a trade war,” he said, while warning that “serious tension will linger between the US and China for a long time.”
Roubini also thinks that the US and Europe could avoid the threat of fresh trade tariffs, but said that Europe was “a bit shaky” and would experience “mediocre growth, but still growth.”
On the Middle East, Roubini said that geopolitical risk would continue to hang over the region, and that another threat could come in the form of a spike in the oil price, but he thought the outlook for crude prices, in the absence of any external shock, was to remain in the $50-$60 per barrel range.
“Geopolitically, the Middle East is always the source of some relative uncertainty. I think that the key issue is whether the tension between Sunni and Shiites, and a number of proxy wars that create instability, become more severe or less severe. I would say hopefully less severe,” he said.
“Whether you like it or not, the civil war in Syria might be over. I think there may be some consensus that there cannot be a military solution to what’s going on in Yemen. I think that while Iran is aggressive, what the US, Saudi Arabia and others are doing is to contain Iran, rather than to trigger regime change that could lead to more conflict. So there is a lot of uncertainty, and now there is maybe the beginning of a new Arab Spring with what is going on in Sudan, Algeria, even with Libya.
“The Middle East is always a source of tensions, but from the global macro-economic point of view the only thing that globally matters from the Middle East is if you have a major oil supply shock …that could lead to a massive spike in oil prices.”
Roubini, who teaches at New York University’s Stern School of Business, said that, “short of a war between the US, Iran and Sunni states,” oil prices would continue to be driven by supply and demand. “For oil to go to $40 or below you need to have real worries about global growth stalling, and I think those worries will fade away. Above $70 is probably not justified by the fundamentals of a slowing global economy, so anything between $50 to the high $60s is my guess.”
He talked at length about the Saudi Arabian strategy of diversifying its economy away from oil dependency.
“In Saudi Arabia, economically there is an ambitious program of modernization because the young leader-to-be has realized that with a with a youth bulge and a high unemployment rate you have to modernize and open up the economy, give jobs and opportunity to people.
“Otherwise, eventually, even for a wealthy country like Saudi Arabia there will be social and political instability. It’s a long-term plan, but if it’s implemented right and consistently it could be successful and Saudi could become a prosperous country,” he said.
On the need for foreign direct investment (FDI) in the Kingdom, Roubini said: “I would say that FDI depends on stability, rule of law, by not creating foreign policy adventures and actions that cause noise. If you can control those things, and if you are serious about modernization and reform, then FDI will come. It might take a while because people will want to make sure things are stable and so on.
“There have been a whole bunch of foreign policy distractions that have been quite expensive. I understand the need to contain Iran but I think the focus should be on economic reform and liberalization, creating education and jobs domestically, that will make the government successful,” he added.
He urged the government of Saudi Arabia to press on with the diversification strategy. “If the government makes renewed effort to reform and modernize, opening up socially and economically domestically, some of those concerns and noises will fade out. Take Aramco. At the end of the day people look at it through the mantle of economic opportunity and domestic stability, and that is key.”