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Global mess brings down equity markets
By Nouriel Roubini |
December 10, 2012, Monday
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Print Edition
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THE upswing in global equity markets that started in July is now running out of steam, which comes as no surprise: With no significant improvement in growth prospects in either the advanced or major emerging economies, the rally always seemed to lack legs. If anything, the correction might have come sooner, given disappointing macroeconomic data in recent months.
Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (Asia) and outright contraction in others (southern Europe).
Economic growth in the United States has remained anemic, at 1.5-2 percent for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the eurozone, has already endured a double-dip recession.
Meanwhile, emerging-market economies - including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa - also slowed in 2012.
In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. But now it is permeating the eurozone's core.
And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming "fiscal cliff," spending cuts and tax increases will invariably lead to some drag on growth in 2013 - at least 1 percent of GDP.
In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.
The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronized fiscal austerity in most advanced economies will dim global growth prospects in 2013. So, what explains the recent rally in US and global asset markets?
The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets.
The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). The European Central Bank's announcement of its "outright market transactions" program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union. The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.
Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well. And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high).
It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies.
But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook.
At the same time, the eurozone crisis remains unresolved, despite the European Central Bank's bold actions and talk of a banking, fiscal, economic, and political union.
Moreover, political and policy uncertainties - on the fiscal, debt, taxation, and regulatory fronts - abound.
In the US, the fiscal worries are threefold: the risk of a "cliff" in 2013, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity.
Yet another reason for the correction is that valuations in stock markets are stretched: Price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low.
With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly.
Nouriel Roubini is chairman of Roubini Global Economics, professor at New York University's Stern School of Business, and co-author of "Crisis Economics." Copyright: Project Syndicate, 2012.www.project-syndicate.org. Shanghai Daily condensed the article.
Starting with the advanced countries, the eurozone recession has spread from the periphery to the core, with France entering recession and Germany facing a double whammy of slowing growth in one major export market (Asia) and outright contraction in others (southern Europe).
Economic growth in the United States has remained anemic, at 1.5-2 percent for most of the year, and Japan is lapsing into a new recession. The United Kingdom, like the eurozone, has already endured a double-dip recession.
Meanwhile, emerging-market economies - including all of the BRICs (Brazil, Russia, India, and China) and other major players like Argentina, Turkey, and South Africa - also slowed in 2012.
In 2013, downside risks to global growth will be exacerbated by the spread of fiscal austerity to most advanced economies. Until now, the recessionary fiscal drag has been concentrated in the eurozone periphery and the UK. But now it is permeating the eurozone's core.
And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming "fiscal cliff," spending cuts and tax increases will invariably lead to some drag on growth in 2013 - at least 1 percent of GDP.
In Japan, the fiscal stimulus from post-earthquake reconstruction will be phased out, while a new consumption tax will be phased in by 2014.
The International Monetary Fund is thus absolutely right in arguing that excessively front-loaded and synchronized fiscal austerity in most advanced economies will dim global growth prospects in 2013. So, what explains the recent rally in US and global asset markets?
The answer is simple: Central banks have turned on their liquidity hoses again, providing a boost to risky assets.
The US Federal Reserve has embraced aggressive, open-ended quantitative easing (QE). The European Central Bank's announcement of its "outright market transactions" program has reduced the risk of a sovereign-debt crisis in the eurozone periphery and a breakup of the monetary union. The Bank of England has moved from QE to CE (credit easing), and the Bank of Japan has repeatedly increased the size of its QE operations.
Monetary authorities in many other advanced and emerging-market economies have cut their policy rates as well. And, with slow growth, subdued inflation, near-zero short-term interest rates, and more QE, longer-term interest rates in most advanced economies remain low (with the exception of the eurozone periphery, where sovereign risk remains relatively high).
It is small wonder, then, that investors desperately searching for yield have rushed into equities, commodities, credit instruments, and emerging-market currencies.
But now a global market correction seems underway, owing, first and foremost, to the poor growth outlook.
At the same time, the eurozone crisis remains unresolved, despite the European Central Bank's bold actions and talk of a banking, fiscal, economic, and political union.
Moreover, political and policy uncertainties - on the fiscal, debt, taxation, and regulatory fronts - abound.
In the US, the fiscal worries are threefold: the risk of a "cliff" in 2013, as tax increases and massive spending cuts kick in automatically if no political agreement is reached; renewed partisan combat over the debt ceiling; and a new fight over medium-term fiscal austerity.
Yet another reason for the correction is that valuations in stock markets are stretched: Price/earnings ratios are now high, while growth in earnings per share is slackening, and will be subject to further negative surprises as growth and inflation remain low.
With uncertainty, volatility, and tail risks on the rise again, the correction could accelerate quickly.
Nouriel Roubini is chairman of Roubini Global Economics, professor at New York University's Stern School of Business, and co-author of "Crisis Economics." Copyright: Project Syndicate, 2012.www.project-syndicate.org. Shanghai Daily condensed the article.
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