NEW YORK – Since
the beginning of the year, the world economy has faced a new bout of
severe financial market volatility, marked by sharply falling prices for
equities and other risky assets. A variety of factors are at work:
concerns about a hard landing for the Chinese economy; worries that
growth in the United States is faltering at a time when the Fed has
begun raising interest rates; fears of escalating Saudi-Iranian
conflict; and signs – most notably plummeting oil and commodity prices –
of severe weakness in global demand.
And there’s more. The
fall in oil prices – together with market illiquidity, the rise in the
leverage of US energy firms and that of energy firms and fragile
sovereigns in oil-exporting economies – is stoking fears of serious
credit events (defaults) and systemic crisis in credit markets. And then
there are the seemingly never-ending worries about Europe, with a
British exit (Brexit) from the European Union becoming more likely,
while populist parties of the right and the left gain ground across the
continent.
These risks are being
magnified by some grim medium-term trends implying pervasive mediocre
growth. Indeed, the world economy in 2016 will continue to be
characterized by a New Abnormal in terms of output, economic policies,
inflation, and the behavior of key asset prices and financial markets.
So what, exactly, is it that makes today’s global economy abnormal?
First, potential
growth in developed and emerging countries has fallen because of the
burden of high private and public debts, rapid aging (which implies
higher savings and lower investment), and a variety of uncertainties
holding back capital spending. Moreover, many technological innovations
have not translated into higher productivity growth, the pace of
structural reforms remains slow, and protracted cyclical stagnation has
eroded the skills base and that of physical capital.
Read more at https://www.project-syndicate.org/commentary/market-volatility-in-global-economy-by-nouriel-roubini-2016-02#pKOi8VfzeJkrXs83.99
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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