Thursday, April 3, 2014

Markets may be underestimating threats to the global economy

 The risk of a hard landing in China, fears over tapering in the US and the ongoing tensions in Crimea show that there is no room for complacency, writes Nouriel Roubini

The world's economic, financial, and geopolitical risks are shifting. Some risks now have a lower probability – even if they are not fully extinguished. Others are becoming more likely and important.
A year or two ago, six main risks stood at centre stage:
• A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and/or Spain).
• A fiscal crisis in the United States (owing to further political fights over the debt ceiling and another government shutdown).
• A public-debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt/GDP ratio).
• Deflation in many advanced economies.
• War between Israel and Iran over alleged Iranian nuclear proliferation.
• A wider breakdown of regional order in the Middle East.
These risks have now been reduced. Thanks to European Central Bank president Mario Draghi's "whatever it takes" speech, new financial facilities to stabilise distressed sovereign debtors, and the beginning of a banking union, the eurozone is no longer on the verge of collapse. In the US, President Barack Obama and Congressional Republicans have for now agreed on a truce to avoid the threat of another government shutdown over the need to raise the debt ceiling.
In Japan, the first two "arrows" of prime minister Shinzo Abe's economic strategy – monetary easing and fiscal expansion – have boosted growth and stopped deflation. Now the third arrow of "Abenomics" – structural reforms – together with the start of long-term fiscal consolidation, could lead to debt stabilisation (though the economic impact of the coming consumption-tax hike is uncertain).

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  Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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