Roubini warns: Next crisis and recession could be even more severe than the last

Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, affirmed that the next economic downturn will be more severe than the last. In the past, he warned about the financial crisis before the crash of 2008 and now he points to a recession and a financial crisis in 2020. 

In a Project Syndicate article, Nouriel Roubini and Brunello Rosa, affirm that despite the current stance of synchronize global growth “it will inevitably lose steam as unsustainable fiscal policies in the US start to phase out. Come 2020, the stage will be set for another downturn – and, unlike in 2008, governments will lack the policy tools to manage it”.

They see that the expansion will likely continue next years “given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path.” But the situation will create the conditions for a financial crisis by 2020, followed by a global recession.

According to them, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. They see the stimulus poorly timed, leading to an overheated economy and inflation above its target. “The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar”. 

Trumps trade disputes will certainly scale leading to slower growth and higher inflation and growth in the rest of the world will likely slow down, they explained. “China must slow its growth to deal with overcapacity and excessive leverage; otherwise a hard landing will be triggered. And already-fragile emerging markets will continue to feel the pinch from protectionism and tightening monetary conditions in the US.”

Roubini and Rosa also warn that US and global equity markets are “frothy” and leverage in many emerging markets and some advanced economies is clearly excessive. “In the case of a risk-off, emerging markets and advanced-economy financial sectors with massive dollar-denominated liabilities will no longer have access to the Fed as a lender of last resort. With inflation rising and policy normalization underway, the backstop that central banks provided during the post-crisis years can no longer be counted on.”

Unlike the financial crisis in 2008, “policymakers who must confront the next downturn will have their hands tied while overall debt levels are higher than during the previous crisis. When it comes, the next crisis and recession could be even more severe and prolonged than the last”, concluded the article. To sum up, the current environment is setting the stage for the next crisis that could be even more severe and longer than the last one. Governments will have fewer tools and money to react, and central banks less degrees of freedom.