Saturday , 13 July 2024

Nouriel Roubini: Global Economy Faces These 4 Major Downside Risks

While recent developments seem to suggest some positive news for the global economy, there are at least four downside risks that could materialize this year – undermining global growth and eventually negatively affecting investor confidence and market valuations of risky assets. [Let me spell them out.] Words: 933

So says Nouriel Roubini in edited excerpts from a guest post on (which Lorimer Wilson, editor of, has further edited below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in its entirety in any article re-posting to avoid copyright infringement.)

Roubini goes on to say:

Since late last year a series of positive developments has boosted investor confidence…[namely]:
  • macroeconomic data from the United States improved;
  • blue-chip companies in advanced economies remained highly profitable;
  • China and emerging markets slowed only moderately;
  • the risk of a disorderly default and/or exit by some members of the eurozone declined;
  • the European Central Bank, under its new president, Mario Draghi, appears willing to do anything necessary to reduce stress on the eurozone’s banking system and governments, as well as to lower interest rates;
  • central banks, in both advanced and emerging economies, have provided massive injections of liquidity;
  • volatility is down;
  • confidence is up, and
  • risk aversion is much lower – for now.
[Be that as it may,] at least four downside risks are likely to materialize this year [which will] undermine global growth and eventually negatively affect investor confidence and market valuations of risky assets:

1. The eurozone is in deep recession:…

  • The credit crunch in the banking system is becoming more severe as banks deleverage by selling assets and rationing credit, exacerbating the downturn…
  • The loss of competitiveness there will persist as relief at the waning prospect of disorderly defaults strengthens the euro’s value. To restore competitiveness and growth in these countries, the euro needs to fall towards parity with the US dollar…
  • The risk of a disorderly Greek collapse is now receding but it will re-emerge this year as political instability, civil unrest, and more fiscal austerity turn the Greek recession into a depression.

2. There is now evidence of weakening performance in China and the rest of Asia:

In China, the economic slowdown underway is unmistakable.

  • Export growth is down sharply…
  • Import growth, a sign of future exports, has also fallen.
  • Chinese residential investment and commercial real-estate activity are slowing sharply as home prices start to fall.
  • China’s infrastructure investment is down, with many high-speed railway projects on hold and local governments and special-purpose vehicles struggling to obtain financing amid tightening credit conditions and lower revenues from land sales.
  • Singapore’s economy shrank for the second time in three quarters at the end of 2011.
  • India’s government predicts 6.9 percent annual GDP growth in 2012, which would be the lowest rate since 2009.
  • Taiwan’s economy fell into a technical recession in the fourth quarter of 2011.
  • South Korea’s economy grew at a mere 0.4 percent in the same period – the slowest pace in two years.
  • Japan’s GDP contracted at a larger-than-expected 2.3 percent, as the yen’s strength weighed down exports.

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3. America’s growth momentum appears to be peaking:

  • Fiscal tightening will escalate in 2012 and 2013.
  • Tax benefits that boosted capital spending in 2011 will expire.
  • Private consumption will remain subdued [as a result of] continuing malaise in credit and housing markets. Indeed, two percentage points of the 2.8 percent expansion in the last quarter of 2011 reflected rising inventories rather than final sales.
  • U.S. exports will weaken as a result of the generally strong dollar, together with the global and eurozone slowdown, will weaken US exports.
  • Still-elevated oil prices will increase the energy import bill, further impeding growth.

4. Geopolitical risks in the Middle East are rising:

While the risk of the possibility of an Israeli military response to Iran’s nuclear ambitions remains low:

  • The current war of words is escalating.
  • The covert war in which Israel and the US are engaged with Iran is escalating,
  • Iran is lashing back with terrorist attacks against Israeli diplomats and, as sanctions bite, 
  • Iran could react by sinking a few ships to block the Strait of Hormuz, or
  • Iran could unleash its proxies in the region – the pro-Iranian Shia in Iraq, Bahrain, Kuwait, and Saudi Arabia, as well as Hezbollah in Lebanon and Hamas in Gaza.

Moreover, there are broader geopolitical tensions in the Middle East that will not ease – and that might intensify:

  • The Arab Spring has produced a relatively favourable outcome in Tunisia, where it started, but developments in Egypt, Libya, and Yemen remain far more uncertain.
  • Syria is on the brink of civil war.
  • There are substantial concerns about political stability in Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially even in Kuwait and Jordan – all areas with substantial Shia or other restless populations.
  • Beyond the countries affected by the Arab Spring, rising tensions between Shia, Kurdish, and Sunni factions in Iraq since the US withdrawal do not bode well for a boost in oil production.
  • There is also the ongoing conflict between the Israelis and the Palestinians.
  • There are also strains between Israel and Turkey.

In other words, there are many things that could go wrong in the Middle East, any combination of which might stoke fear in markets and lead to much higher oil prices…with predictably negative effects on the global economy.


With so many risks in so many places, investors, not surprisingly, will eventually prize liquidity in their portfolios, while shunning riskier fixed assets again when these tail risks materialize. That is yet another reason to believe that the global economy remains far from achieving a balanced and sustainable recovery.

* (To access the article please copy and paste it into your browser.) Copyright: Project-Syndicate, 2012 

Editor’s Note: The above article has been has edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.