Watch the 'double-dip'

'Perfect storm' of factors could see another recession next year: Prof

NEW YORK - The global economy may fall back into a recession by late next year or in 2011 because of rising government debt, higher oil prices and a lack of job growth, said Professor Nouriel Roubini, the New York University economist who predicted the credit crisis.

A "perfect storm" of fiscal deficits, rising bond yields, "soaring" oil prices, weak profits and a stagnant labour market could "blow the recovering world economy back into a double-dip recession", he wrote in a research note yesterday.

"It is getting more likely unless a clear exit strategy from the massive monetary and fiscal stimulus is outlined even before it is implemented."

Prof Roubini, chairman of Roubini Global Economics and a professor at NYU's Stern School of Business, predicted that the global economy will begin recovering near the end of this year. The United States economy is likely to grow about 1 per cent in the next two years, less than the 3-per-cent "trend," he said.

Prof Roubini based his short-term outlook on the worsening condition of the US housing and labour markets, which he called "inextricably linked".

He said a "weak" job market will contribute to another 13- to 18-per-cent drop in house prices, bringing total declines nationally to as much as 45 per cent from their peak.

As a result, Prof Roubini predicted a new round of distress for a financial industry facing economic conditions that were worse than regulators factored into so-called stress tests earlier this year. "The worst-case assumption in US stress tests were that unemployment could average 10.3 per cent next year," Prof Roubini wrote.

"The reality is clearly going to be worse as the unemployment rate is likely to peak around 11 per cent."

Emerging markets may fare better than the industrial world because, "paradoxically", many have better sounder economic foundations than more advanced nations.

"We are now closer than we were six months ago to the end of the worst financial crisis since the Great Depression and the worst global recession in decades," wrote Prof Roubini. "But the road ahead will be very rough and bumpy."

Source: Today, 24 July 2009