Roubini says in case of a Trump win, if he has a radical economic policy, there could be higher inflation, lower economic growth, and a significant correction with higher bond yields and lower stock prices. If he wisely chooses economic advisors who are more mainstream, and if he realises that the debt of the US is unsustainable and he has to do fiscal retrenchment, maybe those economic advisors can suggest a more moderate course of action.
The chances of a recession in the US look low now. The Fed is most likely to cut rates in another fortnight. How do you see the global market shaping up for the rest of 2024?Nouriel Roubini: I would argue that there is a separation between what is going to happen to the economies and what is going to happen to the markets, even if the two are related.
I do agree that the risk of a recession in the US is low right now. I think that the baseline will be one of a soft landing rather than a hard landing, a recession. There is still income generation. The Fed is going to start to cut rates now that the inflation is lower. The private sector is still dynamic. Of course, there are some soft spots like housing because of high interest rates, but the baseline will be that most likely until and unless there is a major global geopolitical shock, we are not going to have a recession in the US.
Of course, that is important not only for the US but also for the global economy because when the US sneezes, the rest of the world catches the cold, as we saw in the case of the Global Financial Crisis (GFC). But there has been a bit of a slowdown, especially in the manufacturing sector. Manufacturing in the US, Europe, and China is almost in a contractionary zone, but services are growing quite robustly. Now, US markets have been buoyant. Even the correction that occurred in August has been reversed by the end of the month. But certainly, there is an element of frothiness in US stock markets. Part of it is driven by the optimism about artificial intelligence (AI) radically changing industry, economies, and the world. But there is some element of frothiness. Some correction might occur, but I do not think it is going to be massive, especially if the economy keeps on growing and the Fed starts cutting rates.
So, the US election is coming in November. Do you think the impact of the US election on the markets worldwide will be the biggest for equity investor in 2024?
Nouriel Roubini: Yes.
Who do you think is best for the equity investor, Trump or Harris?
Nouriel Roubini: We will see what is the result of the election. As of now, it could be Trump winning, or it could be Harris. The polls are very tight and I would say that if Harris is elected, there will be more policy continuity. The kind of economic policy we are seeing, both domestic and foreign, and also the foreign policies of Biden will be pretty much pursued by Kamala Harris’ administration also.
The most uncertainty comes in case Trump is elected. Leaving aside his domestic political views or his foreign political and national security kind of views, on economic policy, there are several risks. Risk number one is that he has threatened to impose 10% tariffs on all imports to the United States, even from friends and allies, and up to 60% for imports from China. Protections will cause inflation, and in turn, will cause less economic growth. He may want also to weaken the value of the dollar as a way of regaining competitiveness. That could lead to financial volatility and instability. If people expect the dollar to weaken, then you could have a flight from the stock market and the bond market in the US because your returns in the dollar will be lower.
Trump is less in favour of central bank independence. He might replace some members of the board, starting even with Powell, and make it less independent. That could cause a rise in inflation expectations. He wants to make tax cuts that he passed in 2017 – which would be expiring next year – permanent. But that cost almost $5 trillion. And if they do not find ways of financing it, the US could have a debt dynamic. It becomes even more unsustainable.
I would say under Trump, if he has a radical economic policy, there could be higher inflation, lower economic growth, and a significant correction with higher bond yields and lower stock prices. If he wisely chooses economic advisors who are more mainstream, and who understand the impact of those trade policies and risk of trade wars and protectionism and currency depreciation are risky for the stock market and the bond market, and if he realises that the debt of the US is unsustainable and he has to do fiscal retrenchment, maybe those economic advisors can suggest a more moderate course of action.
Otherwise, even in the US, market discipline with bond vigilantes and the stock market also punishing in the case of a mistaken policy could force an adjustment of policies if Trump goes in a wrong unorthodox direction.
The Ukraine-Russia war is going on. We have the Israel-Hamas fighting. The Suez Canal are is under the threat of Houthis. How long can the global economy deal with this? Why aren’t the big leaders trying to figure out something?
Nouriel Roubini: We certainly live in a world of geopolitical recession, if not depression. As you pointed out, the Russia-Ukraine war is continuing and is getting worse. Israel and Hamas are still fighting. There is a risk of escalation to involvement in a war with Iran and with Hezbollah. Even the Cold War between the US and China is getting colder. The interesting thing is that both economies and markets have not been so far that sensitive to these geopolitical risks.
My view is that if the conflict between Russia and Ukraine remains contained to the region, then while it affects economies and markets in Russia and Ukraine, it does not have a global impact. It did initially have a global impact because the war led to a spike in natural gas, oil prices, food, fertilisers, because there was a shock to the supply of all these commodities coming from the beginning of the war.
But now channels of exporting agricultural products, even from Ukraine, have reopened. Europe and other countries have been able to buy more natural gas from the Middle East and other parts of the world. Some of the gas and oil of Russia have been diverted to China, to India, and therefore the economic impact on commodity prices has been mild so far. It does not lead to a significant global shock. So, the same thing with Israel and Hamas. If the conflict is only between Israel and Hamas, it is terrible for Israel, it is terrible for Gaza and Palestinians, but the impact economically and market-wise is only on some countries in the region.
If the war were to escalate and be a full war between Israel and Iran, then production and exports of oil from the Gulf would be blocked for weeks, maybe months. There could be a shock to oil prices like in the 1973 Yom Kippur War, and the 1979 Iranian Islamic Revolution. So far, that has not occurred. I would say that these geopolitical risks are a serious threat, but their economic and market impact has been regional rather than global because there has been effectively still a regional conflict with limited global implications.
Now, the Cold War between the US and China is getting colder. As long as it is an economic friction and is gradual, is manageable. If Trump comes to power and imposes a 60% tariff on China, the market economic impact could be severe. And, if the relationship between the US and China were to escalate into a risk of even a war on the issue of Taiwan or the South China Sea, then, of course, the market impact would be very severe.
But I would say the markets, for now, are correctly having the view that some of these conflicts are regional and that the relation between the US and China are difficult and bumpy, but they are not going to escalate to a full-scale confrontation that will be severe for the economy and the markets and the world at large, that might be the explanation of why markets have reacted only mildly to these types of geopolitical risk.
India Should Not Focus on Low-value-added, High-labour-intensive Manufacturing
Prime Minister Narendra Modi has made this thing of making India a Viksit Bharat, which is a developed economy by 2047. How do you think India can reach that? Is it through manufacturing or service or a mixture of both? How do you see India can achieve that goal in your opinion?
Nouriel Roubini: Yes, the potential growth of India is already 6% to 7%. With additional reforms, it can be 8%. We know what other reforms are needed, whether it is land reforms, labour market, more competition, bankruptcy, skilling people, education, even more emphasis on infrastructure, and a wide range of other things.
I think those reforms are going to continue, probably slightly slower than they would otherwise be, given there is now a coalition government but it is okay. It is better to have more sustainable things and a more democratic process of reform rather than one that is not as democratic. So, I think the direction is the right one. I would say that India can get a larger share of global manufacturing, but it is not going to be probably able to have a comparative advantage in low-value-added, labour-intensive manufacturing.
If you do textiles, apparel, or low-end consumer products, there are countries where these things are cheaper, even in Asia whether it is Bangladesh or Vietnam or other ones. India has had traditional advantages in services and IT services, that is going to remain. But in the future, because of AI, there will be greater integration between hardware and software and that integration implies that given the risk, given friendshoring, and given that some FDI is going to move out of China, in things that are more high-value-added, technology-related, whether it is building iPhones or things that have to do with AI and the hardware involved in it, for India, that could be a sweet spot.
Initially, one could argue that those are capital-intensive and not labour-intensive, and there could be a job problem. But by the synergy of going into your comparative advantage that is services and IT services and greater integration between hardware and software, India can also attract a significant amount of manufacturing because in the future it is not going to be either software or hardware, but the integration between the two.
So, India should not focus necessarily on low-value-added, high-labour-intensive manufacturing, where it does not have a comparative advantage. India should focus higher up in the value chain and that is going to create synergies and integrations and many other jobs. Services are becoming global. One can be a computer programmer in Bangalore, and provide services all over the world. And if that is one of the skills that Indians have, your market is not your large domestic market, but it is a market of 8 billion people, where you can provide those kinds of technology services., I would try to stay away from low-end and low-value-added labour-intensive manufacturing because that is not really where you should be.
