The Single-Engine Global Economy by Nouriel Roubini

http://www.project-syndicate.org/commentary/us-growth-and-weakening-global-economy-by-nouriel-roubini-2014-10

The global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers.

The risk of a global crash has been low, because deleveraging has proceeded apace in most advanced economies; the effects of fiscal drag are smaller; monetary policies remain accommodative; and asset reflation has had positive wealth effects

Many emerging-market countries are still growing robustly.

1.Unfortunately, only one of its four engines is functioning properly: the Anglosphere. US growth, currently exceeding potential output, can provide sufficient global lift.

2.The other has now stalled after an anemic post-2008 restart.Europe is one shock away from outright deflation and another bout of recession

The European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds

Germany continues to resist a much-needed stimulus to boost eurozone demand

3.The third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus.

While the Bank of Japan only now decided to increase its rate of quantitative easing

And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase

Given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further

4.Emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds

Rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds

Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession

Structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now

Rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power

How long the global economy can remain aloft on a single engine?

Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth

If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff

Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich the main beneficiaries of asset reflation reflation may be creating asset-price bubbles

But with slowing down capital spending and consumption, given the option value of waiting during uncertain times and 

Falling oil prices may provide cheaper energy for manufacturers and households, but persistently low oil prices induce a fall in investment in new capacity.

Private and public debts in advanced economies are still high and rising – and are potentially unsustainable, especially in the eurozone and Japan.

High debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement

The rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labor migration,