Global economy faces 'perfect storm'

Expert who forecast 2008 meltdown fears debt and slow growth.

ABU DHABI // The world economy could face a perfect storm of soaring sovereign debt and slowing growth, according to the economist who predicted the last global financial crisis.

Debt problems in the US and Europe, slowing growth in China and stagnation in Japan could combine to harm the economic recovery, the New York University professor Nouriel Roubini said.

This in turn could hurt the GCC by choking off demand for oil, the region's main revenue source, other economists say.

Mr Roubini said there was a one-in-three chance of different factors converging to smother growth from 2013. Other possible outcomes were "anaemic but OK" global growth or an "optimistic" scenario in which the economy improved.

"There are already elements of fragility," he told Bloomberg News. "Everybody's kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest."

Politicians and investors have closely followed Mr Roubini's comments since he made a series of accurate predictions about the global meltdown in 2008.

High unemployment in the US, rising oil and food prices and inflationary pressures in emerging markets risk derailing the recovery from the downturn, economists say.

Globally, stock markets have shed more than US$3.3 trillion (Dh12.1trn) since the start of May amid concerns about cooling growth. Regionally, several countries are struggling to rebound from unrest that has threatened to tear apart their economies, although Egypt received a vote of confidence yesterday in its emergence from instability.

Moody’s Investors Service said a recent $3 billion IMF loan was “credit positive” for the country. The cash would narrow a widening budget deficit, bolster the fragile balance of payments and contain local banks’ exposure to the government, the ratings agency said.

“However, Egypt’s political uncertainties continue to pose challenges for the country,” it cautioned.

Concerns about the impact on supply of recent regional turmoil and a failure by Opec to agree to an output rise last week have helped to keep oil prices high. Prices of North Sea Brent oil rose to $119 a barrel yesterday. The US government and others have cautioned that higher oil prices could undermine fragile recoveries around the world, curbing demand in the process.

Any weakening of demand would probably hit prices and risk upsetting the break-even prices on which many GCC states base their annual finances, said Jarmo Kotilaine, the chief economist at NCB, Saudi Arabia’s biggest bank. The reliance of Saudi Arabia, Bahrain and Oman on oil revenues has grown after their governments launched fiscal packages to alleviate social and political tensions. King Abdullah of Saudi Arabia announced expenditure increases of $129bn in April and March.

“This region has never fully lived up to the decoupling expectation,” said Dr Kotilaine. “Evidence from the past three years shows it has been vulnerable to external factors and at times of global stress this region has still taken a beating.”

Signs of strain are emerging in several of the world’s biggest economies. Politicians in the US are at loggerheads about raising the country’s $14.3 trillion debt limit.

An impasse also remains about how to ease a sovereign debt crisis that has embroiled Greece, Ireland and Portugal. Officials need to find a way to limit Greece’s financial problems if it is to receive further bailout support this month.

Concerns that China’s growth may be slowing are also emerging. Money growth in the country hit a 30-month low last month and banks extended fewer new loans than expected.

Japan's economy, the world's third largest, dipped into recession in the last quarter, after the March 11 earthquake and tsunami and ensuing nuclear crisis.

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