Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Nouriel Roubini: The anatomy of the coming recession

Three negative supply shocks could trigger a global recession - and none of them is amenable to the tools of countercyclical macroeconomic policy

There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the US is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.

The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator.

The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence, robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.

The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.

All three of these potential shocks would have a stagflationary effect, increasing the price of imported consumer goods, intermediate inputs, technological components, and energy, while reducing output by disrupting global supply chains. Worse, the Sino-American conflict is already fueling a broader process of deglobalization, because countries and firms can no longer count on the long-term stability of these integrated value chains. As trade in goods, services, capital, labor, information, data, and technology becomes increasingly balkanised, global production costs will rise across all industries.

Moreover, the trade and currency war and the competition over technology will amplify one another. Consider the case of Huawei, which is currently a global leader in 5G equipment. This technology will soon be the standard form of connectivity for most critical civilian and military infrastructure, not to mention basic consumer goods that are connected through the emerging Internet of Things. The presence of a 5G chip implies that anything from a toaster to a coffee maker could become a listening device. This means that if Huawei is widely perceived as a national-security threat, so would thousands of Chinese consumer-goods exports.

It is easy to imagine how today’s situation could lead to a full-scale implosion of the open global trading system. The question, then, is whether monetary and fiscal policymakers are prepared for a sustained – or even permanent – negative supply shock.

Following the stagflationary shocks of the 1970s, monetary policymakers responded by tightening monetary policy. Today, however, major central banks such as the US Federal Reserve are already pursuing monetary-policy easing, because inflation and inflation expectations remain low. Any inflationary pressure from an oil shock will be perceived by central banks as merely a price-level effect, rather than as a persistent increase in inflation.

Over time, negative supply shocks tend also to become temporary negative demand shocks that reduce both growth and inflation, by depressing consumption and capital expenditures. Indeed, under current conditions, US and global corporate capital spending is severely depressed, owing to uncertainties about the likelihood, severity, and persistence of the three potential shocks.

In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession.

Given the potential for a negative aggregate demand shock in the short run, central banks are right to ease policy rates. But fiscal policymakers should also be preparing a similar short-term response. A sharp decline in growth and aggregate demand would call for countercyclical fiscal easing to prevent the recession from becoming too severe.

In the medium term, though, the optimal response would not be to accommodate the negative supply shocks, but rather to adjust to them without further easing. After all, the negative supply shocks from a trade and technology war would be more or less permanent, as would the reduction in potential growth. The same applies to Brexit: leaving the European Union will saddle the UK with a permanent negative supply shock, and thus permanently lower potential growth.

Such shocks cannot be reversed through monetary or fiscal policymaking. Although they can be managed in the short term, attempts to accommodate them permanently would eventually lead to both inflation and inflation expectations rising well above central banks’ targets. In the 1970s, central banks accommodated two major oil shocks. The result was persistently rising inflation and inflation expectations, unsustainable fiscal deficits, and public-debt accumulation.

Finally, there is an important difference between the 2008 global financial crisis and the negative supply shocks that could hit the global economy today. Because the former was mostly a large negative aggregate demand shock that depressed growth and inflation, it was appropriately met with monetary and fiscal stimulus. But this time, the world would be confronting sustained negative supply shocks that would require a very different kind of policy response over the medium term.

Trying to undo the damage through never-ending monetary and fiscal stimulus will not be a sensible option.


* Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
IMF Upgrades Global Growth Forecast as Weaker Dollar Supports Outlook
House Republicans Move to Defund OECD Over Global Tax Dispute
France Opens Criminal Investigation into X Over Algorithm Manipulation Allegations
Trump Steamrolls EU in Landmark Trade Win: US–EU Trade Deal Imposes 15% Tariff on European Imports
ChatGPT CEO Sam Altman says people share personal info with ChatGPT but don’t know chats can be used as court evidence in legal cases.
Intel Reports Revenue Beats but Sees 81% Rise in Losses
Politics is a good business: Barack Obama’s Reported Net Worth Growth, 1990–2025
UN's Top Court Declares Environmental Protection a Legal Obligation Under International Law
"Crazy Thing": OpenAI's Sam Altman Warns Of AI Voice Fraud Crisis In Banking
The Podcaster Who Accidentally Revealed He Earns Over $10 Million a Year
UK Government Considers Dropping Demand for Apple Encryption Backdoor
Japanese Man Discovers Family Connection Through DNA Testing After Decades of Separation
Russia Signals Openness to Ukraine Peace Talks Amid Escalating Drone Warfare
Switzerland Implements Ban on Mammography Screening
Pogacar Extends Dominance with Stage Fifteen Triumph at Tour de France
President Trump Diagnosed with Chronic Venous Insufficiency After Leg Swelling
CEO Resigns Amid Controversy Over Relationship with HR Executive
NVIDIA Achieves $4 Trillion Valuation Amid AI Demand
Tulsi Gabbard Unveils Evidence Alleging Political Manipulation of Intelligence During Trump Administration
Centrist Criticism of von der Leyen Resurfaces as she Survives EU Confidence Vote
Trump Announces Coca-Cola to Shift to Cane Sugar in U.S. Production
FIFA Pressured to Rethink World Cup Calendar Due to Climate Change
Zelensky Reshuffles Cabinet to Win Support at Home and in Washington
"Can You Hit Moscow?" Trump Asked Zelensky To Make Putin "Feel The Pain"
Church of England Removes 1991 Sexuality Guidelines from Clergy Selection
Superman Franchise Achieves Success with Latest Release
Hungary's Viktor Orban Rejects Agreements on Illegal Migration
Air India Pilot’s Mental Health Records Under Scrutiny
Jamie Dimon Warns Europe Is Losing Global Competitiveness and Flags Market Complacency
Moonshot AI Unveils Kimi K2: A New Open-Source AI Model
Martha Wells Says Humanity Still Far from True Artificial Intelligence
Nvidia Becomes World’s First Four‑Trillion‑Dollar Company Amid AI Boom
EU Delays Retaliatory Tariffs Amid New U.S. Threats on Imports
Trump Proposes Supplying Arms to Ukraine Through NATO Allies
US Opens First Rare Earth Mine in Over 70 Years in Wyoming
Bitcoin Reaches New Milestone of $116,000
Severe Heatwave Claims 2,300 Lives Across Europe
Declining Beer Consumption Signals Cultural Shift in Germany
Emails Leaked: How Passenger Luggage Became a Side Income for Airport Workers
Polish MEP: “Dear Leftists - China is laughing at you, Russia is laughing, India is laughing”
Western Europe Records Hottest June on Record
BRICS Expands Membership with Indonesia and Ten New Partner Countries
Elon Musk Founds a Party Following a Poll on X: "You Wanted It – You Got It!"
China’s Central Bank Consults European Peers on Low-Rate Strategies
France Requests Airlines to Cut Flights at Paris Airports Amid Planned Air Traffic Controller Strike
Poland Implements Border Checks Amid Growing Migration Tensions
Emirates Airline Expands Market Share with New $20 Million Campaign
Amazon Reaches Milestone with Deployment of One Millionth Robot
Yulia Putintseva Calls for Spectator Ejection at Wimbledon Over Safety Concerns
House Oversight Committee Subpoenas Former Jill Biden Aide Amid Investigation into Alleged Concealment of President Biden's Cognitive Health
×