Roubini said in the case of Trump winning, if he has a radical economic policy, there may be higher inflation, lower economic growth, and a significant correction with higher bond yields and lower stock prices. If he had wisely chosen a more mainstream economic adviser, and if he had understood that the US debt was unsustainable and needed fiscal retrenchment, perhaps that economic adviser could have suggested a more moderate course of action.
The chances of a recession in the US seem low right now. The Fed is most likely to reduce rates in the next two weeks. How do you see the global market shaping up for the rest of 2024?Nouriel Roubini: I would argue that there is a separation between what will happen in the economy and what will happen in the market, even though the two are related.
I agree that the risk of a recession in the US is low right now. I think the baseline will be one of soft landing instead of hard landing, recession. There is still income. The Fed will start cutting rates now because inflation is lower. The private sector is still dynamic. Of course, there are some soft spots like housing due to high interest rates, but the baseline will most likely be until and unless there is a global geopolitical shock, we will not have a recession in the US.
Of course, it is important not only for the US but also for the global economy because when the US sneezes, the rest of the world catches a cold, as we saw in the case of the Global Financial Crisis (GFC). But there is some slowdown, especially in the manufacturing sector. Manufacturing in the US, Europe, and China is almost in the contraction zone, but services are growing. Currently, the US market is doing well. Even the correction that occurred in August has been reversed by the end of the month. But of course, there is an element of frothiness in the US stock market. The segment is driven by optimism about artificial intelligence (AI) radically changing industries, economies, and the world. But there is some element of frothiness. Some correction may happen, but I don’t think it will be big, especially if the economy continues to grow and the Fed starts to cut rates.
So, the US election is coming up in November. Do you think the impact of the US election on global markets will be the biggest for equity investors in 2024?
Nouriel Roubini: yes already.
Who do you think is best for equity investors, Trump or Harris?
Nouriel Roubini: We will see what the election results are. Now, maybe Trump wins, or maybe Harris. The polls are very tight and I would say that if Harris is elected, there will be policy continuity. The type of economic policy that we are seeing, domestic and foreign, and also Biden’s foreign policy will also be implemented by the Kamala Harris administration.
That is most unlikely to happen if Trump is elected. Leaving the view of domestic politics or foreign politics and national security, in terms of economic policy, there are some risks. The number one risk is that he has threatened to impose a 10% tariff on all imports into the United States, even from friends and allies, and up to 60% on imports from China. Protectionism will lead to inflation, and will lead to low economic growth. They may want to devalue the dollar as a way to regain competitiveness. That can lead to financial volatility and instability. If people expect that the dollar will weaken, then you can fly away from the stock market and the bond market in the US because the return on the dollar will be lower.
Trump is less in favor of central bank independence. He may change some of the board members, starting with Powell, and become less independent. That could lead to an increase in inflation expectations. They want to make the tax cuts passed in 2017 — which expire next year — permanent. But it’s worth almost $5 trillion. And if it doesn’t find a way to finance it, the US could end up in dynamic debt. It becomes even more unsustainable.
I would say under Trump, if he has a radical economic policy, there could be higher inflation, lower economic growth, and a significant correction with higher bond yields and lower stock prices. If he is wise to choose a more mainstream economic advisor, and who understands the impact of trade policies and the risks of trade wars and protectionism and currency depreciation is risky for the stock market and the bond market, and if he realizes that the debt of the US is not sustainable and he has to do retrenchment fiscally, perhaps that economic adviser could suggest a more moderate course of action.
Otherwise, even in the US, market discipline with bond and stock market vigilantes also punishing in the case of wrong policies can force policy adjustments if Trump moves in the wrong unorthodox direction.
The Ukraine-Russia war is on. We have an Israel-Hamas war. The Suez Canal is under threat from the Houthis. How long can the global economy cope with this? Why do the leaders not need to pursue?
Nouriel Roubini: We are certainly living in a world of geopolitical recession, if not depression. As you know, the Russia-Ukraine war continues and worsens. Israel and Hamas are still at war. There is a risk of escalation for involvement in the war with Iran and with Hezbollah. Even the Cold War between the US and China is getting colder. What is interesting is that the economy and markets have not been very sensitive to these geopolitical risks.
My view is that if the conflict between Russia and Ukraine remains in the region, then while it affects the economy and markets in Russia and Ukraine, it has no global impact. At first there was a global impact because the war caused a surge in natural gas, oil prices, food, fertilizer, because there was a shock to the supply of all these commodities from the beginning of the war.
But now the channel of exporting agricultural products, even from Ukraine, has been reopened. Europe and other countries have been able to buy more natural gas from the Middle East and other regions. Some Russian gas and oil have been diverted to China, to India, and therefore the economic impact on commodity prices has been mild so far. It did not cause a significant global shock. So, the same thing with Israel and Hamas. If the conflict is only between Israel and Hamas, it is bad for Israel, it is bad for Gaza and Palestine, but the economic and market-wise impact is only in some countries in the region.
If the war were to escalate and become a full-scale war between Israel and Iran, oil production and exports from the Gulf would be blocked for weeks, possibly months. There may be shocks to oil prices as in the Yom Kippur War of 1973, and the Islamic Revolution of Iran in 1979. So far, this has not happened. I would say that this geopolitical risk is a serious threat, but the economic and market impact has been regional rather than global because there are still regional conflicts with limited global implications.
Today, the Cold War between the US and China is getting colder. As long as the economic friction is gradual, it can be managed. If Trump comes to power and imposes 60% tariffs on China, the impact on the market economy could be severe. And, if the relationship between the US and China will escalate to the risk of even war over the issue of Taiwan or the South China Sea, then, of course, the impact on the market will be very heavy.
But I will say that the market now has the right opinion that some of these conflicts are regional and the relationship between the US and China is difficult and bumpy, but it will not rise to a full-scale confrontation that will be heavy for the economy and the market and the world in general, which can be an explanation why the market has reacted only mildly to this type of geopolitical risk.
India Should Not Focus on Low-value-added, High-labor-intensive Manufacturing
Prime Minister Narendra Modi has created a chapter of Viksit Bharat India, which is an advanced economy in 2047. Do you think India can reach that? Is it through manufacturing or service or a mix of both? How do you see India achieving these goals in your opinion?
Nouriel Roubini: Yes, India’s growth potential is already 6% to 7%. With additional reforms, it could be 8%. We know what other reforms are needed, whether it is land reform, the labor market, more competition, bankruptcy, skilled people, education, even more focus on infrastructure, etc.
I think the reform will continue, maybe slower than it would have been, because now there is a coalition government but that’s okay. It is better to have more sustainable things and a more democratic reform process than an undemocratic one. So, I think it’s the right direction. I would say that India can achieve a greater share of global manufacturing, but it will not be able to have a comparative advantage in low-cost, labor-intensive manufacturing.
If you’re making textiles, clothing, or consumer products that are cheap, there are countries that are cheaper, even in Asia whether it’s Bangladesh or Vietnam or something else. India has a traditional advantage in services and IT services, which will remain. But in the future, thanks to AI, there will be a greater integration between hardware and software and this integration shows that given the risk, given the friends, and that some FDI will move from China, in terms of higher- Value-added, technology -related, whether it is building iPhones or things that have to do with AI and hardware involved in, for India, that can be a sweet spot.
First, one may argue that it is capital intensive and does not require labor, and there may be a labor problem. But with the synergy to gain a comparative advantage is services and IT services and greater integration between hardware and software, India can also attract many manufacturers because in the future it will not be software or hardware, but the integration between the two.
So, India should not focus on low-value-added, labor-intensive manufacturing, where it has no comparative advantage. India needs to focus higher in the value chain and will create synergy and integration and many other projects. Services go global. One can become a computer programmer in Bangalore, and provide services worldwide. And if this is one of the skills that Indians have, your market is not a big domestic market, but a market of 8 billion people, where you can provide such technology services. Labor intensive manufacturing is late and cheap because it’s not where you need to be.
(tagKangoTranslate) Nouriel Roubini | Dr. Doom depression Trump
