Economy faces “Tropical Storm”, financial damage

Nouriel Roubini, an economics professor, addresses a panel discussion at the SALT conference in Las Vegas May 14, 2014. Rick Wilking/Reuters

• The economy is likely to face a “tropical storm” that will result in at least a mild recession, Nouriel Roubini said.
• The “Dr. Doom economist warned that even a slight downturn could hurt stock prices and lead to damage.
• He previously warned of a stagflationary debt crisis for the US economy.

The global economy is headed for a “tropical storm” that could wreak havoc on markets and the global financial system, according to Dr. Doom” Wall Street economist Nouriel Roubini.

Roubini, who was one of the first to declare the 2008 financial crisis and has warned of catastrophe for the US economy for nearly 20 years, warned of an imminent global recession in an editorial for Project Syndicate on Tuesday.

Even as he retracted previous predictions that the economy was facing a “Bermuda Triangle” of financial stressors, the global economy and markets could still face significant turbulence, he warned, as an economic slowdown looks increasingly likely as central bankers struggle to him to achieve inflation under control.

“Even if a major hurricane appears less likely for the global economy than it did a few months ago, it is still likely that we will encounter a tropical storm that could cause significant economic and financial damage,” Roubini said, outlining four possible scenarios for the global economy :

1. A soft landing. Central banks around the world will keep inflation on target, avoiding a recession.
2. A “soft” landing. Central banks will hit their inflation targets, but in doing so they will plunge their economies into a brief, mild recession.
3. A hard landing. Central banks are unable to bring inflation back to ideal levels without triggering a more severe recession. Higher interest rates will eventually plunge the global economy into a downturn and potentially wreak havoc in debt markets, which will come under pressure as borrowing costs rise.
4. A stagflationary crisis. If central bankers abandon their inflation target to preserve financial stability, they could inadvertently trigger a stagflationary crisis, a scenario in which inflation becomes entrenched and expectations spiral out of control.

Roubini estimated that the second scenario, a short, shallow recession, is the most likely to materialize as serious stressors on the global economy, such as the credit crunch caused by bank failures earlier this year, have eased. Still, even a mild recession could hurt investors:

“But even a short and shallow recession — let alone a hard landing — would result in significant falls in US and global stocks. And then if central banks were indecisive, the resulting rise in inflation expectations would push up long-term bond yields and eventually.” “This hurts stock prices because of the higher discount rate applied to dividends,” Roubini warned.

Economies around the world are already slowing as the inflation battle drags on. The US economy is showing signs of running out of fuel as consumers hold back on spending. Meanwhile, the euro zone slipped into a technical recession after posting two quarters of negative GDP, and China’s economy also grappled with the disappointing economic reopening following the COVID-19 pandemic.

Investors worried about a possible recession last year as the Fed aggressively hiked interest rates to fight inflation. Interest rates are now at their highest since 2007 and the New York Fed believes the economy has a 71% chance of slipping into recession by May 2024.

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