What Is Happening with the Economy?

At the end of last year, famous economist Nouriel Roubini made somber predictions regarding the global economy. This crisis, in spite of the fiscal austerity, will spark an economic disaster.

Eugen Cojocariu, 29.04.2012, 18:33

At the end of last year, famous economist Nouriel Roubini made somber predictions regarding the global economy. This crisis, in spite of the fiscal austerity, will spark an economic disaster.





Roubini said he didn’t foresee a third world war, but that social and political instability in Europe and the other developed economies would turn severe. In the 1930’s, the economist pointed out, the world was financially unstable. Devalued currencies led to money getting printed in excess, there were trade wars, and many countries, such as Germany, Italy, Spain and Japan had populist, radical and aggressive governments.





The same mistakes of the Great Depression of 80 yeas ago should not be repeated. That was a time when financial stimulus was used way too soon, and this is a great risk right now. Roubini, whose opinions carry a lot of weight since some of his predictions were confirmed, also pointed to China, anticipating a crash landing in about two years, if Beijing holds on to its model of economic growth. China’s economic stimulus program, based on consumption rather than on investment, has supported constant growth, but has also fed inflation, increasing debt at the same time.





A Wall Street Journal review shows that social unrest is four times higher than a decade ago. Now, Roubini warns again — 30% of Chinese loans will go bad, and this will shake the very foundations of that country’s banking system. In order to sustain economic activity, China’s central bank brought down twice in the last four months the obligatory minimum bank reserves, which allowed commercial banks to borrow more.





It is hard to know if China’s economy, which has been overheating over the last few years, will have a smooth landing, somewhat dimming its spectacular growth, or towards a collapse, if it found itself incapable to sustain the pace of this growth, as Pacific Investment Management also said. That corporation, which runs one of the largest hedge fund, expects advanced economies to stagnate.





Statistics show that Turkey is the country with the highest economic growth in Europe and the second highest in the world after China’s. The Turkish economy in 2011 went up 8.5%, and for this year the Ankara government estimated a growth of 4%. The target for next year is 5 percent. In the EU, the treaty for fiscal stability with its associated fund are instruments meant to secure the economic future. In order for them to work, however, national reforms are needed.





Problem states like Italy and Spain have already made firm commitments and are trying to apply the strategy suggested by Brussels: curbing tax evasion, efficient tax collection, streamlining spending. Madrid is faced with record high unemployment and with a dramatic drop in consumption. Italy, with a growing public debt, which now stands at 120%, last year had modest growth. The Mario Monti government applied a number of essential reforms and declared war to tax evasion. The Italian premier said that, failing that, Italy would have ended up like Greece.





Beyond all technicalities, if several European economies slump back into recession, this might translate as a new shockwave for investors. In the case of Bucharest, experts’ concerns have been confirmed. After two quarters of consecutive economic decline, starting April 1st Romania has fallen back into recession.





It is not the only country to experience difficulties, as the domino effect has started to be felt throughout the world. In March, Romania’s annual inflation rate has dropped to 2.4%, a historical low in the past 23 years. The vice-president of the Association of Financial and Banking Analysts in Romania, Ionut Dumitru, believes the current fluctuation of the inflation rate is normal, while the inflation will continue to grow as the end of the year draws near:





Ionut Dumitru: “We can say the inflation rate for March was in line with market expectations, and thus it produced little surprise. Owing to the base effect, the annual inflation rate has reached historic lows. In the same period of last year we reported high monthly inflation rates, while this year the rates have gone down, thus lowering the annual average. Over the next months we will probably see a negative base effect. Consequently, starting with May the inflation rate will probably go up to 3-odd percent, although it will not exceed 4%, the upper limit set by the National Bank of Romania for 2012”.



The average inflation rate over the past 12 months stood at 3.8% in Italy, 3.1% in Belgium, 2.3% in Germany and 1.8% in Spain.