An optimistic GCC recovery scenario from Nouriel Roubini

It was a little surprising perhaps to find an optimistic recovery scenario in the final pages of Professor Nouriel Roubini’s menacingly gloomy new book ‘Crisis Economics: A Crash Course in the Future of Finance’. Well, that was the ArabianMoney interpretation from a UAE or GCC viewpoint.

Professor Roubini contends that by 2012 the world will be out of its deflationary cycle and could once again be facing inflation, particularly in commodity prices. Nothing would be better for the economic prospects of the UAE than a nice big rise in the price of oil.

Getting to 2012

However, in order to get to 2012 it is first necessary to take the pain of the rest of 2010 and 2011. Dr Gloom has no good news on that score.

First of all the ‘new bubble’ in stock markets, bonds and emerging markets that has blown up since the stock market lows of March 2009 has to be burst. Professor Roubini offers amazing insight here, especially when you have to realize printing times mean that he must have written these comments many months ago.

He wonders, for example, what it would mean if the dollar stopped devaluing and started to rise. That is indeed what has now happened, much to general astonishment.

‘Whatever the reason, if the dollar appreciates suddenly – just as the yen did when the carry trade in that currency unraveled – a stampede will ensue. Investors who went long on risky global assets and short on the dollar will suddenly reverse course. The bubble will then burst’.

Dollar reversal

That is what we saw in May and has continued into June with the euro down to $1.19 at the time of writing this article. According to Professor Roubini only when this purge is done will the stage be set for a durable recovery. But this will take ‘years not months’ because of the huge debts to amortize and also likely involve a painful inflationary phase with higher rates of interest.

Indeed, although Professor Roubini says he sees a U-shaped recession and not a W-shaped or double-dipper, that seems to be what he is actually forecasting. For the current modest US recovery just turns out to be a bounce up before another leg down, followed by a slow recovery.

But for the Gulf Oil States this early inflation story is a passport to an earlier than expected recovery on the back of higher oil prices, or at least that is how ArabianMoney would read it. Admittedly there is still that rough crossing to reach this nirvana. But the light at the end of the tunnel might not be a train heading straight for us this time.