World not going to go back to the status quo that existed before Qasem Soleimani's assassination: Nouriel Roubini

Nouriel Roubini, a prominent economist, thinks it would be naïve to believe that the US-Iran tensions are over. In an interview with Nishanth Vasudevan on the sidelines of the CFA Society India’s investment conference, the New York University professor, named ‘Dr Doom’ for predicting the 2008 financial crisis, said he does not expect a recession unless oil moves to $100. Edited excerpts:

Markets seem to be relieved with the de-escalation of the tensions between the US and Iran. Do you think this calm is here to stay?
I believe this calm is temporary. Markets are seriously underpricing the risk of escalation of the tensions and the conflict between the US and Iran. The markets are saying that the risk of a full-scale war between the US and Iran may be low, which might be correct. If there is a full-scale war, and oil prices go above $100 per barrel because of damaged oil facilities and the Strait of Hormuz is blocked, you will have recession in the US, and globally. Trump doesn’t want that. But saying that we are not going to have a full-scale war doesn’t mean that we are going to go back to the status quo that existed before the assassination of Qasem Soleimani.

There is a range in the middle of an escalation in which both sides are going to fight. Iran has a range of ways of using its proxies whether it is in Syria, Iraq, Lebanon or in Gaza to cause trouble, and terrorist attacks can occur like they did in the past against the US, Israeli assets or Gulf assets, both in the region or other parts of the world.

Oil can go well above $70 per barrel, may be not $100 as it would if there was a full-scale war. Closer to $80 will be my baseline. The No. 2 in Iran, who was supposed to become the new president, has been killed. Is anybody so naive to believe that by sending 12 rockets, they can declare victory and say we’re finished with what we want to do with the US?

What are the implications of the conflict on the global economy?
If the scenario was a full-scale war, and then you have the Iranians manning the Strait of Hormuz, attacking tankers, or damaging all facilities in Saudi Arabia or the Emirates, then oil prices can be above $100 per barrel. You could have a global recession in that extreme scenario. But that’s not my baseline. I think the escalation within the US and Iran would be on a variety of virtual and real fronts directly and through proxies. When those things do materialise, then oil prices are going to creep higher towards $80 per barrel.


Last year, the risk-off was driven by worries about the US-China trade war or Brexit. This time around, the risk-off is going to be driven by worries of an escalation between the US and Iran. You’re going to have a lower business sentiment, lower capital spending, a correction in global equity markets and oil moving towards $80. Growth this year could be slightly lower than last year, slightly short of a full-scale recession, unless there is a full-scale war.

Has phase one of the US-China trade deal tempered your forecast of a recession?
If there was no phase-one deal, and if by December 15, the US imposed 15% tariff on the remaining Chinese goods and increased the tariffs on the other ones, then that alone could have been one of the tipping points for the global economy. The good news about phase one is that risk has been avoided, and, therefore, the tail risk of a recession this year is lower. The bad news is that it is the smallest deal that the US and China could reach. That’s why people call it a skin deal.

Two, in an election year, when the Democrats attack Trump on China and other things, even that deal could unravel. We could be at the beginning of a process of de-globalisation rather than globalisation, of fragmentation of the global economy, of balkanisation of technology, industry, manufacturing and services supply chain and of a decoupling on a spectrum of industries between the US and China. It is a process, but is one which is like a negative supply shock to the global economy. That one will be ongoing, not just this year, but for the next decade.


Do you think the Fed is running a high-pressure economy?
The Fed did the right thing during the past year when there were these global headwinds. The economy is growing around 2%, and 2% is the potential growth of the US, given the fundamentals. The unemployment rate is very low, and the job market is reasonably strong. There are global clouds, capex is weak, other sectors of the economy are fragile but when the economy is growing at potential and employment is low, 1.5% policy rate is probably too low. And if those clouds from the US, China, and Brexit were to disappear, normalising rates, not now but after the election year, would be the right thing.

In an election year, Trump can become more protectionist. So, it is a year where he must appeal to his base and economic nationalism, whether it is bashing migrants or being protectionist. That’s not good for the US and global growth and eventually it is not good for the markets either.

Do you think the unconventional monetary policy that central banks have followed in the past decade is here to stay?
If there is another recession, all the central banks are going to go back to unconventional monetary policy. The term QE or negative policy rate did not even exist in the typical macroeconomic textbook. Now, those policies have become effectively conventional, and explicitly the Fed had said if we go to a recession we have only 150 basis points of headroom on the policy.

What the Fed is now considering is whether they should do stuff that Europe and Japan have done. ECB and BOJ are still in negative territory and they are continuing the purchase of private and public assets. The Fed at least has some room of going to zero, giving forward guidance and then doing QE. If the next recession is severe, people are going to do variants of what people refer to as a modern monetary theory or what people also call people’s QE, or permanent monetisation of fiscal deficit.

That implies that during the next recession, the central bank cannot be the only game in town, there will have to be a fiscal stimulus. But if you have a fiscal stimulus with high deficit and long rates can go higher, the way to prevent it will be for the central bank to buy bonds of the government, not in the secondary market but in the primary market. So, policy will have to become even more unconventional if there is another economic downturn. All this stuff is here to stay forever.

India’s economic growth has been weakening and there is a debate whether fiscal stimulus should be used to revive the economy. Your thoughts?
The most important thing is not fiscal policy or even monetary. The RBI has cut rates five times last year but the transmission of the monetary policy to the real economy is weak because you have a broken transmission mechanism. A wide range of structural reforms are needed to try to increase potential growth. I think that your strong prime minister took eyes off the ball on economic issues and has gotten pre-occupied with political stuff that may make him popular in the short run. But if the economy is going to falter, his popularity is going to go down. There’s a wide range of things to do — really fixing the credit system and labour market reform, land reform, innovation, fixing agriculture, incomes of workers, infrastructure policies. I would be happy if there is an increasing budget deficit that is going towards not current spending, but capital spending, because that makes sense. But you must really be careful to do it in the right way, in a selective way, rather than wasting a lot of money across the board.