Complex Made Simple

Eighth Arab Strategy Forum examines economic state of the world in opening session

Nouriel Roubini: the world will not overcome slow growth and interest rates will get lower.

The eighth Arab Strategy Forum (ASF 2015) opened in Dubai with the first session examining the economic state of the world.

Headlining the segment, eminent economist Nouriel Roubini and former US Treasury Secretary Lawrence Summers touched on issues relating to the global economy, Looking ahead at the state of the world in 2016, Roubini said:“Potential growth is falling, while actual growth is below potential.

Monetary policies are still unconventional with interest rates hovering around zero. While many have assumed that high inflation would be the outcome, in reality the reverse has happened.

Roubini stated: “Inflation has become lower and lower in the US and UK. Next year in Eurozone and Japan, inflation is going to stay low, inflation in the US may go higher at the headline level. Growth is below potential. Real interest rates are going to be low.”

Summers spoke of ‘continuing secular stagnation that is registering high savings and low investments’. He said: “Whatever you want to call it, secular stagnation has been evolving for quite some time into a new world where the propensity to save is high relative to propensity to invest. This is driven by many factors – by increase in inequality, people knowing that they will live longer, emerging markets looking to accumulate reserves and their inability to attract investment – all this increases global savings. On the other side, we have cutting edge companies like Apple and Google that are awash in cash but no longer have a growing labor force that are equipped to . If we take all of that together you are going to have very high savings, and very low investments. At the end of the day savings has to equal investments – question is how does that process happen? The challenge of chronic excessive saving is relative to investment—that’s not something that’s going to go away next month or next year.”

On his part, Roubini said: “There is more of a public private debt, with painful deleveraging, increasing inequality, demographics, imbalance between saving and investment. In spite of innovations, we still have growth falling. However, I will be slightly optimistic for the following reason – we are on the cusp of a major technology revolution that will be changing the world: leading to increase in productivity. We have energy technology, biotech with all major innovation in bio medical research; information technology: social media, Internet of things, as well as the manufacturing technology (automaton, robotics, artificial intelligence, personalized manufacturing, 3D painting and so on), financial technology and finally defense technology.”

On the question on what politicians could do in a global stagnant economy, Summers said: “Nobody knows what will happen in 2050.” Summer said one could talk about a 10-15 year horizon and in that context he highlighted demand side secular stagnation.

“I suspect that productivity statistics are underestimating productivity – in other words they are measuring total spending correctly but are underestimating quantity and we are overestimating price. My suspicion is we have more deflationary forces than we imagine. The more you think you are going to have a lot of supply, the more there is attention on demand. Excessive saving relative to investment becomes a problematic constraint. That’s why I put more emphasis on demand side secular stagnation.”

He added: “There is no time to jabber about normalization returning, because the ‘normal’ is long gone. We are in a different world and the interest rates that once worked are not interest rates that will lead to reasonable growth. Central Banks need to get over the aspiration of getting back to some golden age or interest rates of 15 years ago.

“Second, we have to take certain steps that will help raise the level of demand. Creating more investment – this means enabling more consumption.”

Summers cited the example of the US infrastructure, which is is decaying and it is madness that it is not investing more in it. The second example he cited was of India. It is almost impossible to start an entrepreneurial business in India. In the spirit of entrepreneurship narrative, Prime Minister Narendra Modi is looking to solve the chronic savings investment imbalance.

“That is the key to understanding to what is happening to global economy and you can customize the agenda country to country. The usual patterns of policy won’t do—there is a highly constructive agenda that can be followed that will make a difference but we will not see the situation reverse any time soon.”

Roubini added his perspective to the question: “Are we back to a stable system: will the world economy enjoy improved stability next year: economics to finance?” He followed through with his observation: “I would call it an “unstable disequilibrium” in the global economy. We have an imbalance between savings and investment and there is not enough demand.One explanation is the paradox that technology should be good for growth but technology is becoming increasingly capital intensive, skilled bias and labor savings. This increases inequality. “

Concurring with Lawrence Summers on the need for aggressive infrastructure spending, Roubini said: “The exception is China which has done over investment in infrastructure. But emerging countries and even in the Middle East there is a huge demand for infrastructure. And even in advanced economies such as Europe and Japan.”

Roubini said 2015 has been the year of strength for the US dollar with the trend likely to continue in 2016.

“While Federal Reserve is going to raise their rate starting this week, which some us don’t agree with,others such as European Central Bank and Bank of Japan will continue their quantitative easing. It is not just emerging markets but also advanced economies which will weaken. Fragile emerging markets will remain fragile and their currencies will be weakening further. “
“If the Fed starts hiking rates this week, it has to make sure that two things don’t occur: the pace of normalization is so fast that you get a sharp appreciation of the dollar, and two, if you hike too much, capital spending will be affected.”

For his part, Summers said: “There is no certainty at all that what the Fed does is going to drive the US dollar up further. Roughly what will happen to the dollar going forward will depend which way the Fed surprises. If the Fed goes as is predicted there will be no further dramatic impacts on the dollar. I don’t think the world needs larger divergences; larger appreciation of the dollar will further depress impact on capital flows to developing countries.”

Commenting on China, Roubini said that the growth potential in 2016 is 6% plus or minus. “The good news is that they will not have to devalue their currency. I don’t see a global recession next year.”
Summers observed that while looking at China, the fundamentals go beyond financials. For example, China’s aging labour force and the process of transition of low productivity of rural areas into high productivity urban areas is over.

He added that the effects of economic slowdown will remain for a while.

“Although we are not in 2008-2009 anymore, we are not back to normal. It is important find ways of innovative financing especially through partnerships between public and private sectors, reduce spending and bring in better accountancy and accountability in addition to identifying priorities without delaying major projects on the pretext of debts.”

Commenting on Dubai and the advances he witnesses each time he visits the city, Summers said: “Dubai is on its way to become the cosmopolitan city in the Middle East. At a time when many countries in the region are facing deep crises, Dubai and the UAE are a positive example and a beacon of hope.”
Responding to a question on what governments should do in the future, Summers said it would be different from one country to another. However, governments should take into considerations the worst case scenarios. It would not be wise for GCC governments to plan their budget balance without considering the possibility of the price of oil staying under US$50.