Is the global economy out of the woods?
Two years after near-meltdown, with the U.S. looking sluggish, equity markets groggy and Europeans fighting a debt crisis, experts gathered in Italy offered a generally gloomy outlook — especially for the United States and much of the industrialized world.
The doomsayers were led by New York University economist Nouriel Roubini, who warned in booming tones that "there is a significant risk of a double-dip recession in the United States" as well as in Japan and many European countries.
Some of the assembled experts and leaders at the annual Ambrosetti Forum on the shores of Lake Como were somewhat more upbeat: economist Edwin Truman, a senior fellow of the Peterson Institute for International Economics, predicted that "the most likely global outlook is subpar growth."
But most appeared to agree on a sobering array of basic problems standing in the way of true recovery:
— Many of the growth drivers in place since the collapse of Lehman Brothers are winding up or have ended, including not only the massive stimulus spending but tax breaks, schemes such as the "cash for clunkers" program and — for some countries like Russia — high commodity prices.
— The stimulus deemed necessary to jump-start moribund economiessoon causes deficits and debt, upsetting the markets enough to spur austerity — which undermines growth.
— Most of the world's growth stems from a developing world led by China — which is so dependent on exports that it needs the West to continue to buy, and so will suffer if recovery in the rich world proves short-lived.
— Europe continues to lose competitiveness partly because of the euro, which — for all the fretting over its dip earlier this year at the height of the Greek debt crisis — remains high in purchasing price parity terms versus the U.S. dollar.
— The sector that is widely seen as the spark of the global recession — U.S. real estate — has not recovered, with house-buying flat and the mortgage market, with its related financial instruments, essentially still in ruins.
— The jobs picture is not improving and in parts of the developed world — such as Spain, with some 20 percent unemployment — it is disastrous.
"Conditions in the U.S. labor market are awful," said Roubini, who gained celebrity for predicting the global collapse of 2008 when others were still celebrating the boom times.
He added that even if some U.S. growth is maintained in coming quarters it will be so low — perhaps an annualized 1 percent, which means per capita stagnation — that "it will feel like recession for most people."
Harvard University historian Niall Ferguson noted that since 2001 the United States has seen its debt-to-GDP ratio double to 66 percent and that it may well be headed toward the danger zone of 100 percent.
"This is a completely unsustainable fiscal policy," said Ferguson. "Pretty soon the U.S. will be spending more on debt service than national security. ... That's a tipping point for any global power."
Americans "just have to go down in their living standards" after years in which their living standards soared in part based on foreign credit which is no longer there," said University of Munich economics professor Hans-Werner Sinn. Jacob Frenkel, Chairman of JP Morgan Chase International, urged the United States to rein in entitlements as part of a "political deal" that recognizes reality.
Chairing a panel, CNBC anchor Maria Bartiromo drew laughs by challenging the scowling Roubini to come up with "any good news."
He offered that "emerging economies have high potential growth."
But even that comes with a caveat: Roubini warned that world growth leader China was too dependent on exports to the struggling West and predicted that within a year its economic growth will be overtaken by India, a huge nation much more reliant on its domestic market for development.
The leading Chinese delegate to the forum, Cheng Siwei, seemed to agree with the criticism. "We must change our investment pattern from investment driven to relying more on domestic consumption," said Cheng, a former top Chinese official who chairs the China Soft-Science Research Society among other positions.
What about Greece, whose near-default four months ago rattled the nerves of investors around the globe?
"Greece will not make it," said Sinn. He said the world can either subsidize Athens indefinitely, force a degree of austerity that actually risks "civil war," or — in what he suggested was the least bad option — encourage Greece to restore its drachma currency despite the domestic banking collapse that could well result.
Sinn noted that bond spreads — the difference between the cost of borrowing for troubled countries such as Greece and solid ones such as Germany — have swiftly returned to the startling levels that preceded the Greek bailout in May.
Truman ended his remarks on a high note, noting that in recent quarters' "U.S. productivity increase has been significant."
But that development, while good for companies' bottom lines, is also a reflection of the stagnant labor market and the shrinkage of payrolls as firms hope to produce as much as before with fewer and more productive staff.
In perhaps an illustration of that psychology, several hundred business leaders at the forum were asked for their projections on their own companies' prospects. Voting electronically, some 70 percent predicted a rise in turnover by the end of 2010 and almost half predicted a rise in their firms' investment.
But less than a third saw a chance for new hiring; almost half saw no change — and about a quarter predicted even more reductions.