One Man’s Opinion: Is The European Recession Continuing?

The recession in the peripheral countries of Europe are continuing and have affected the core, says Nouriel Roubini, Nobel Laureate economist and chairman of Roubini Global Economics.

France and Germany have slowed down since their major markets, the peripheral Europe and Asia, including China, have witnessed slowdowns. The eurozone recession – fed by fiscal austerity, a strong euro, a bank credit crunch in the periphery, and lack of business and consumer confidence, will continue in 2013, he noted.

Asked if he agrees with The Financial Times’ choice of Mario Draghi as the person of the year, Roubini answered in the affirmative. By last summer, the eurozone faced the prospect of complete disintegration and Draghi, through his OMT announcements, reduced those tail risks.

Today, the risk of Italy and Spain losing debt market access is lower. The probability of Greece leaving the currency bloc has also come down temporarily. That being said, the fundamental problems in the eurozone, which includes lack of growth, recession, high private and public debt, lack of competitiveness, lack of structural reforms and issues of debt sustainability, still remain unresolved, he noted.

Asked if he foresees Europe weighing down global growth in 2013, Roubini said it’s possible since the gross domestic product of Europe is as large as the US. Therefore, what happens in eurozone matters for Central and Latin America and Asia, he concurred.

Europe faces dilemmas such as slow growth, corruption, inefficiency and bad demographics. Asked to prioritize the challenges of the currency zone, Roubini said there are short-term problems like recession, slow growth, balkanization of the banking sector and balkanization of public debt markets.

Also, part of the population is aging faster than the US, so the potential for growth is low. Due to lack of structural reforms in certain parts of the region, potential for productivity growth is also low. Hence, low potential for growth combined with high debt ratio makes the debt burden unsustainable, he noted.

Asked if below three percent global GDP growth is his definition of a recession, Roubini said GDP growth below 2-1/2 percent will result in a recession. At Roubini Global Economics, GDP growth has been estimated at close to three percent due to multi-speed recovery across the globe, he noted.

In advanced economies, growth will be barely one percent while emerging markets will grow at a little over five percent in 2013. However, some of the advanced economies like Europe, Japan and the UK will witness outright recession, he observed.

Asked if he’s bullish on America, Roubini said long-term fundamentals of the US economy are much stronger than other advanced economies. Growth will be about 1.7 percent due to a modest amount of fiscal drag next year.

However, many tail risks, including a bigger fiscal cliff, a worsening eurozone crisis, a Chinese hard landing and a spike in oil prices (due to tensions in the Middle East), could make things worse for the US in 2013, he cautioned. You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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