Nouriel Roubini: We are facing a ‘long and ugly’ recession

One of the first experts to predict the recession in 2008 warns that we are expecting a major economic downturn, and numerous economists predict such a downturn as early as this year.  Earlier this month, strategists Bank of America (BofA) wrote that they expect 'a mild recession' over the next year. 

Other experts, such as former U.S. Treasury Secretary Larry Summers, have been negative in their recession forecasts, predicting that only a deep recession will be sufficient to correct the forty-year-high inflation plaguing the country. It seems that economist Nouriel Roubini, a professor at New York University and CEO of Roubini Macro Associates, who earned the nickname Dr. Doom for predicting the real estate market crash in 2007 and 2008, has chosen his side. 

In a recent interview with Bloomberg, Roubini stated that a recession is likely to hit the U.S. by the end of 2022, after which it will affect the rest of the world, and it is possible that it will last the entire year of 2023.

– It will not be a short and shallow recession. It will be fierce, long, and ugly – said Roubini. 

 Debts and zombie companies 

In order to prevent rising inflation in the U.S., the Federal Reserve has implemented an aggressive series of interest rate hikes to cool the economy. The goal is to enable a soft landing for the economy, where inflation returns to the Federal Reserve’s targeted annual rate of two percent, without causing additional economic downturn or significant increase in unemployment.  

However, with the current economic climate, the Fed’s goal of a soft landing is 'an impossible mission' according to Roubini, who sees the rapid growth of corporate and government debt over the past year as an indicator. During the 2008 recession, Roubini argued that credit agencies and the government mismanaged and neglected large amounts of consumer and corporate debt, contributing to the downturn. In the Bloomberg interview, he commented that the economy today faces very similar threats. 

Roubini believes that the environment created by rising interest rates cannot end well due to the rising levels of global debt accumulated after the pandemic. Interest rates on loans continue to rise, as the Fed has signaled, thereby creating a larger number of so-called zombie companies – those that emerged in the period before the pandemic but are now struggling without profits and the ability to finance their debts.

– Many zombie institutions, zombie households, companies, banks, shadow banks, and zombie countries will die as rates continue to rise – said Roubini. 

'A long and ugly recession' will also devastate financial markets, he warned. The S&P 500, which had one of its worst days of the year after last week’s inflation reading, could fall between 30 and 40 percent, depending on how severe the recession is. 

Stagflation in the style of '70s

Despite rising interest rates, Roubini said that inflation in the U.S. could persist due to significant supply chain shocks caused by the pandemic, ongoing consequences of the war in Ukraine, and China’s zero-COVID policy, which continues to slow economic activity in the country. The combination of low economic growth and rising inflation could result in the worst global stagflation scenario reminiscent of the 1970s, Roubini warned. Back then, prices were high, yet economies stagnated.

Institutions like the World Bank have repeatedly warned that a return to stagflation remains a serious problem for the global economy. As early as 2020, Roubini warned that a new 'Great Depression' could hit the U.S., primarily due to rising levels of debt. In July, he predicted that 'a severe recession and a debt and financial crisis' are at the door due to the increasing number of zombie companies in the economy. 

However, not every market observer agrees with Roubini’s opinion. Ark Invest CEO Cathie Wood recently tweeted that economists like him will be shocked by the rapid decline in inflation.