Experts foresee trouble ahead

CERNOBBIO, Italy – 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 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 economies soon 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.

The warnings come amid mixed news on indicators. The European Central Bank raised its growth projections Thursday and its president, Jean-Claude Trichet, said recession was “not in the cards.” But the bank said the situation remained uncertain and that it would keep measures to supply banks with additional credit in place until the end of the year.

The U.S. unemployment rate rose in August for the first time in four months as hiring by private employers proved insufficient to keep pace with a large increase in the number of people looking for work. 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,” he said. “Pretty soon the U.S. will be spending more on debt service than national security. … That’s a tipping point for any global power.”

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.