Worst is yet to come: Economist Stephen Roach says US needs ‘miracle’ to avoid recession

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Negative economic growth in the first half of the year could foreshadow a much deeper downturn that could last into 2024.

Stephen Roach, chairman of Morgan Stanley Asia, warns that the US needs a ‘miracle’ to avoid a recession.

“We’re definitely going to have a recession as the delayed effects of this major monetary tightening kick in,” Roach told CNBC’s “Fast Money” on Monday. “They haven’t fallen for it at all now.”

Roach, a senior fellow at Yale University and former Federal Reserve economist, suggests Fed Chair Jerome Powell has no choice but to take a Paul Volcker approach to tightening. In the early 1980s, Volcker aggressively raised interest rates to curb runaway inflation.

“Go back to the kind of pain Paul Volcker had to inflict on the US economy to crush inflation. He had to get the unemployment rate above 10%,” Roach said. “The only way we won’t get there is if the Fed under Jerome Powell keeps its word, stays focused on discipline and gets that real federal funds rate in the restrictive zone. And the restrictive zone is still a long way off. from where we are now.”

Despite the sharp rate hike by the Fed, the unemployment rate is at 3.5%. It corresponds to the lowest level since 1969. That could change Friday when the Bureau of Labor Statistics releases its August report. Roach predicts that the price will certainly rise.

“The fact that it hasn’t happened and the Fed has implemented significant monetary tightening to date shows how much work they have to do,” he noted. “The unemployment rate should probably go above 5%, hopefully not much higher than that. But it could go to 6%.”

The ultimate turning point may be the consumer. Roach speculates that they will soon capitulate due to ongoing inflation. Once they do, he predicts the slump in spending will reverberate across the broader economy and cause pain in the labor market.

“We will have to have a cumulative decline in the economy” [GDP] somewhere between 1.5% and 2%. And the unemployment rate will have to go up by at least 1 to 2 percentage points,” Roach says. “That would be a recession in the garden varieties.”

‘Cold War’ with China

The prognosis abroad is not much better.

He also expects the world economy to sink into a recession. He doubts China’s economic activity will absorb the impact, citing the country’s zero-covid policy, severe supply chain backlogs and tensions with the West.

Roach is particularly concerned about the relationship between the US and China, which he writes about in his new book, “Accidental Conflict: America, China and the Clash of False Narratives,” due out in November.

“In the last five years we have gone from a trade war to a technical war and now a cold war,” Roach said. “If you’re in this trajectory of escalating conflict, as we’ve been, it doesn’t take much spark to turn it into something much more serious.”

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