One of the biggest economic questions of our time is whether certain nations – particularly in the developed world – are heading for a so-called ‘double-dip’ recession, where two periods of declining Gross Domestic Product (‘GDP’) tightly bookend a short period of growth. For example, the United Kingdom is one country where this phenomenon may well be occuring: after an economic slump that lasted for much of 2008 and 2009, a 0.7% decline in GDP was registered for the fourth quarter of 2010.
However, a rich, elegant piece recently penned for the Financial Times by Nouriel Roubini* – Professor of Economics at New York University’s Stern School of Business and socialite extraordinare – makes several excellent observations that leads one to reconsider the whole double-dip dilemma, including the following:
1. Three out of the past five global recessions have followed a Middle East geopolitical shock that led to a spike in oil prices;
2. During the most recent recession, while eyes were transfixed on the September 2008 bankruptcy of global financial behemoth Lehman Brothers, oil prices doubled in the twelve month period to the summer of 2008, peaking at US$148 per barrel;
3. High oil prices are a huge burden for most major actors in the global economy and have the potential to tip economies into recession.
These facts are sobering enough, but in the contemporary geopolitical context it is possible to view them as devastating. As Roubini himself notes, partly as a result of the recent upheavals in Tunisia and Egypt, oil prices are now hovering around US$100 per barrel; downward pressure on oil prices is limited by the commodity being priced in a currency being subjected to quantitative easing measures, i.e. US dollars, and inelastic supply, i.e. a rather finite amount of oil left to be extracted.
Moreover, there are numerous events that are highly likely to occur in the short- or medium-term which may well engender further spikes: Israeli-Palestinian friction; unrest of the type witnessed in recent weeks in any number of Middle Eastern countries; rapidly intensifying usage and resource acquisition by China and India; further devaluation of the US dollar; the list stretches on.
This would appear to make the chances for sustained growth in much of the developed world slim, and instead produce a pattern that is reminiscent of that staple of après-ski menus – fondue – whereby economies dip in and out of recession in much the same way as bread is dunked in melted Gruyère: with great regularity. These multiple-dip contractions may give birth to a new science of fonduenomics; remember where you heard this concept first.
*Original photo © 2009 Kjetil Ree (http://commons.wikimedia.org/wiki/User:Kjetil_r)