Nouriel Roubini, the world renowned economist who earned the moniker “Dr. Doom” after predicting the fall of the U.S. housing market and the global recession of 2008, spoke to students at the Sauder School of Business about the current state of world financial affairs in a recent lecture.
The famed economist, who Foreign Policy magazine named one of the “Top 100 Global Thinkers” two years in a row, shared his economic outlook as part of a speaker series hosted by Sauder’s Canaccord Learning Commons.
The world’s economy is shifting into new period of change, says the economist who was a senior advisor at the U.S. Department of the Treasury.
“There is an accelerated growth in advanced economies while we're seeing a slowdown of growth in emerging economies.”
Roubini points to three reasons why advanced economies, including Canada, the U.S., the United Kingdom and the Eurozone, are finally picking up and set to show strong growth this year.
First, advanced economies, with the exception of Japan, will have less fiscal drag – fewer tax increases and spending cuts, he explains.
Second, many of these economies have finished their deleveraging process – cuts to spending to reduce high levels of debt.
Third, over the last three years, investment has been stymied by geopolitical risks: a break-up of the Eurozone, a fiscal shutdown in the U.S., and a potential war between Iran, Israel and the U.S., with a spike in oil price as a result. But none of these scenarios now seem likely, Roubini concludes.
While advanced economies can draw a fiscal sigh of relief, emerging markets are looking at a very different scenario.
“With emerging markets, the big elephant in the room is China,” Roubini says of the second largest economy in the world.
Despite China soon outgrowing the U.S. to become the world’s largest economy, there are underlying problems.
“In China, fixed investments are something like 50 per cent of GDP, while private consumption is something like 30 per cent of GDP. That is very abnormal. No country can be so good that every year they take half of their GDP and reinvest it,” he says.
The country needs more consumption and less investment, and more labour-intensive growth instead of capital-intensive growth, says Roubini. At the same time, he is concerned that the reforms will not come into effect quickly enough.
“The more China postpones rebalancing, the higher the risk for a hard landing by maybe next year or the year after,” he says, adding that a Chinese crash would be bad news for commodity exporters such as Canada.
And while he says the picture is rosier for advanced economies, with U.S. and other hard-hit housing markets in recovery mode, other housing markets are showing signs of trouble.
“If you look at places such as Canada, Switzerland, Norway, Sweden, France, Germany, Hong Kong, Singapore and China – their housing prices have been growing too fast in the last couple of years,” he says.
“The ratio between income and price is rising. The amount of mortgage debt is rising very sharply. The over-heated nature of these markets is becoming, for a lack of a better word, a yellow flag.”