“We are facing the most terrible decades ahead of us - one we have not seen in many decades.”
Nouriel Roubini, the economist also known as “Dr. Doom” for his gloomy outlook on the global economy, looks a little weary. He had just finished telling a wide-eyed crowd in Seoul about the unprecedented risks the global economy will face in a few years. These risks are not just monetary and financial but also social, political, geopolitical, demographic, environmental and technological. He calls them “Megathreats,” a term he first introduced in a book by the same name in 2022.
One threat is daunting enough, but Roubini lives up to his moniker by outlining ten. “We live in a world where there are both economic and non-economic threats, and all these threats interact with each other, so we cannot address one separately from the other,” he said during an interview with the Chosun Daily on May 22, after he gave an hour-long speech at the 15th Asian Leadership Conference held in Seoul, South Korea.
These threats include growing debt, geopolitical tensions leading to hot and cold wars, deglobalization, changing demographic trends due to low birth rates and aging, climate change, de-dollarization, rising inequality and massive unemployment triggered by AI.
Such a myriad of threats, or confluence of calamities, is the perfect recipe for stagflation. “We are moving into a period of secular stagflation, where inflation is going to be above target and growth is going to be lower.”
His warnings, albeit pessimistic, are worth heeding. When Roubini warned of a global recession following a U.S. housing slump in 2006, his predictions were met with skepticism. But when the 2008 global financial crisis took the world by storm, he was heralded as a “pessimist sage.”
Some threats are imminent, and some are slow-moving, according to Roubini. One of the more imminent risks involves the upcoming U.S. presidential elections. “The cold war between the U.S. and China is about to get colder over time because strategic competition is worsening,” he said. If Donald Trump is elected President, policies of isolationism are likely to intensify, further raising geopolitical uncertainties, he added.
“Donald Trump said that if he becomes president, he will impose a 10% tariff on all U.S. imports from allies such as Europe, South Korea, Japan, and up to 60% on Chinese goods. He wants allies to spend more on their own defense.” Roubini noted that this could be “tricky” for South Korea, which relies heavily on global trade and depends on U.S. troops for defense. Trump may wield tariffs and trade restrictions as leverage, such as requiring Korean companies to produce more goods in the U.S. in exchange for lower tariffs.
“The challenge for Korea comes from being part of China’s global supply chain. Slow Chinese growth and more geopolitical rivalries make it difficult for Korea, which historically has been an export-led country. [As U.S.-China tensions escalate,] friends and allies of the U.S. will have to partially de-risk if not decouple from China.”
He predicted that despite China’s efforts to keep annual growth rates near 5%, this year’s growth will likely remain in the 4% range. “China’s growth is weakening trend-wise, but this year, China is planning on implementing enough stimulus so it will likely achieve 4.2-4.5% annual growth,” he explained.
As for the U.S. economy, he is a little more optimistic. “A no-landing is a possibility for the U.S. this year, but it’s a tail scenario,” he said. “A no-landing scenario for the U.S. implies that the Federal Reserve doesn’t cut rates at all or maybe increase them next year. Higher for longer implies the stock market goes down. It implies that the dollar is stronger. It means that other currencies become weaker and the borrowing costs of emerging countries become higher.”
He added, “My baseline scenario is closer to a soft landing.” Roubini expects the Fed to cut rates twice this year, once in September and “maybe once in November and December.” A soft-landing scenario implies that the dollar will potentially remain strong for the rest of the year.
“Over time, the U.S. trade deficit is going to stay large, and the Fed is going to cut interest rates, so there will be less incentive to invest in the U.S. But overall, for this year, I don’t expect that the trade-weighted value of the dollar is going to move a lot.”
He claims a short to medium-term challenge the global economy will face is the AI threat. “AI is going to lead to massive technological unemployment, for both white-collar and blue-collar workers,” Roubini said.
“If you are in the top 10% distribution of educational skills or human capital, technology is going to make you more productive, but if you are a white-collar or a blue-collar worker with low to medium value-added skills, your income and your jobs are going to be threatened by AI. Eventually, we might need universal basic income to deal with that.”
But he offered a potential unexpected upside to this worrying trend by suggesting that AI could counter low productivity caused by declining birth rates. “The conventional wisdom is that countries that have a lot of population growth have higher productivity, but with the adoption of AI, productivity growth may become higher even if the population is falling,” he said.
“I think less people is going to be good in a world where technology is going to destroy more jobs. So rather than trying to increase the number of children, we could concentrate on increasing productivity.”
Overall, the prospects seem grim in the long term - is there no way to counter secular stagnation? Roubini pointed to investment in technology as a possible antidote. “The most important positive aggregate supply shock comes from technology because, in the last few decades, adoption of technology has increased growth productivity and reduced cost of production. It has been disinflationary.”
“If you can invest as much as you can in various technologies, you are creating forces that boost growth and reduce the cost of production and inflation. These technologies include not just AI but also robotics, automation, greentech, and advanced manufacturing. Having leadership in high-end semiconductor chips and other things related to the hardware part of AI as opposed to the software is also important.”
Regarding concerns that South Korea’s exports are highly dependent on semiconductors, he said, “Dependence on the semiconductor sector is not critical. Semiconductors are one of the important industries of the future robotic automation, and there’s going to be more demand for more advanced chips.”
