China's reopening after the latest Covid spread and India's relatively good growth are unlikely to prevent a hard landing for the global economy, feels Nouriel Roubini, professor emeritus at Stern School of Business, New York University. In an interview with Ishaan Gera, Banikinker Patnaik and Vinay Pandey, Roubini says policy rates will have to be well above what key central banks are signalling and financial markets are not ready for this negative surprise. Edited excerpts:
You have warned of a stagflation like never before. When do you see it taking root, and what will be its impact on emerging economies like India?
There are concerns about stagflation, both in the short run and over the medium term. In the short run, there are three negative aggregate supply shocks: Covid-19, Russia's invasion of Ukraine and the Zero Covid policy of China. These led to supply-chain bottlenecks and resulted in a rise in inflation and a weakness of economic activity. In addition, there was also a bad policy-excessively loose monetary, fiscal and credit easing-that caused a spike in inflation.
Some people expect a soft landing but I'm not convinced. Getting inflation to drop from 10% to 5-6% in advanced economies was easy but pushing it to 2% is going to be harder.
On the supply side, there's been a huge underinvestment in new capacity -not just in energy but across the board. Goldman Sachs expects the average index of all commodity prices to be up 43% compared to last year. If that were to happen, headline inflation will go up and so will core inflation. Labour issues imply that wage inflation in the US, and even Europe, will be in the 5-6% range, and not ease to 3%. Also, given that the labour-intensive service sector is the significant sector in most economies, wage inflation is going to hurt more.
Most central banks in advanced economies expect that by the end of this year, core inflation will fall to 3% and then reach the target of 2% by the end of next year. Instead, core inflation will remain sticky-above 4%. The US Federal Reserve wants to stop around 5% (interest rate) and the European Central Bank (ECB) at about 3%. But the policy rates in the US will have to go towards 6% and in the Eurozone 4% (to control inflation). In that situation, you get the hard landing of the real economy. And much higher interest rates are going to create distress, especially in those countries which have already very high debt ratios.
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