Lisa Simpson
Aug 17,2009
In: Finance

The Prediction is that a Weak Recovery Will Be Followed by a Double-Dip Recession

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Professor Nouriel Roubini of New York University has predicted that although there will be recovery towards the end of 2009 it will be very weak. This will be followed by a double-dip recession towards the end of 2010.

The steady negative figures coming from the employment sector will directly have an effect on the economy – the latter being highly reliant on spending by consumers. Commenting on the recent employment statistics Prof. Roubini said, “These raw figures on job losses, bad as they are, actually understate the weakness in world labor markets. If you include partially employed workers and discouraged workers who left the U.S. labor force, for example, the unemployment rate is already 16.5 per cent. Monetary and fiscal stimulus in most countries has done little to slow down the rate of job losses. As a result, total labor income – the product of jobs times hours worked times average hourly wages – has fallen dramatically.”

After studying the fall in income from labour and its connection to the spiralling economic downturn Roubini observed that it is this factor that will make worse several indices that are interlocked. There will be more home and student loan defaults, credit card woes will continue to increase and all this will further make toxic the assets lying in the account books of banks. The net result will be extension of the credit crunch. On the one hand while government deficits will increase so will it expenditures in the social sector like benefits for the unemployed etc. Roubini comments that this is the worst economic calamity since the Great Depression. He commented, “The higher the unemployment rate goes, the wider budget deficits will become, as automatic stabilisers reduce revenue and increase spending (for example, on unemployment benefits). Thus, an already unsustainable U.S. fiscal path, with budget deficits above 10 per cent of GDP and public debt expected to double as a share of GDP by 2014, becomes even worse. This leads to a policy dilemma: rising unemployment rates are forcing politicians in the U.S. and other countries to consider additional fiscal stimulus programs to boost sagging demand and falling employment. But, despite persistent deflationary pressure through 2010, rising budget deficits, high financial-sector bailout costs, continued monetisation of deficits, and eventually unsustainable levels of public debt will ultimately lead to higher expected inflation — and thus to higher interest rates, which would stifle the recovery of private demand.”

Summed up it means that the very policies being presently followed will lead to the second round of disaster.