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The world’s advanced economies face a more than 50 per cent chance of plunging into recession in the next year as the Euro zone crisis rattles markets, an economist dubbed “Dr Doom” said today.
New York University economics professor Nouriel Roubini said without meaningful reform by European leaders, the Euro zone could start to fall apart and lead to another financial meltdown worse than in 2008.
The severity of the downturn hinged on whether the Euro zone could avoid a messy break-up as Greece and other nations struggle with crippling debt.
Roubini, who earned the “Dr Doom” moniker for predicting the last global economic crisis long before it hit, also warned China faced a “hard landing” and could not maintain its status as the world economy’s growth engine.
“In my view, there’s a significant probability, more than 50 per cent, that over the next 12 months there’s going to be another recession in most advanced economies,” he told a Commonwealth business forum in Perth.
“Whether you call it a double dip recession, a continuation of the first recession or a second recession doesn’t matter, it’s semantic.”
Roubini said much depended on a meeting of European Union nations this week that will seek to thrash out a deal to avoid a full-blown Greek default and limit contagion within the Euro zone.
He said markets were looking for policies that would kickstart real economic growth in struggling Euro zone countries, rather than “financial engineering” that saw wealthy EU nations take on the debt burden of poorer ones.
Unless Europe’s leaders enacted serious changes, the Euro zone could start to crumble, potentially dragging down the world economy in the same way the collapse of US investment bank Lehman Brothers did in 2008, he said.
“In a situation where it becomes disorderly, with defaults by a number of countries and a resulting exit of a number of states from the Euro zone and its eventual break-up, the shock that could occur ... could be as large, if not larger, than the fall of Lehman in 2008,” Roubini said.
“A recession that is severe in advanced economies, the collateral damage even on emerging markets could be significant.”
Roubini recommended devaluing the euro to stimulate exports from the Euro zone and slashing interest rates.
“If they were serious about restoring growth in the short-term, they would cut rates down to zero,” he said.
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