Proceed With Caution? What Nouriel Roubini, Larry Summers And Mohamed El-Erian Say About The Economy As We Enter 2023

2922 certainly didn't do well in the diaries of optimistic market commentators and forecasters, including ones who thought inflation and the market rout would be short-lived.

Not only was inflation persistent, but it also made the Federal Reserve look like it was late to the party. Equity markets bore the brunt of the subsequent action by central banks in their race to catch up with the situation. Nothing was spared — not equities, not bonds.

The SPDR S&P 500 ETF Trust SPY lost over 20% since the beginning of the year, while the Vanguard Total Bond Market Index Fund ETF BND shed over 13%.

Some people thought Vladimir Putin’s war with Ukraine and his tantrums in response to Western sanctions would keep oil afloat. That too fizzled out later in the year as demand concerns from China came to the fore.

As the world readies itself for 2023, here’s a look at warnings sounded by three prominent economists known for their hard, and often contrarian, stances.

Nouriel Roubini: In mid-December, prominent economist Nouriel Roubini, known as "Dr. Doom" for his precise prediction of the 2008 financial crisis, openly expressed his skepticism over Wall Street and policymakers’ “conventional wisdom,” stating it has been “systemically wrong.”

“First, they said inflation’s going to be transitory . . . Then there was a debate over whether rising inflation was due to bad policies or bad luck,” he said. Roubini said he disagreed with the consensus and said the recession would be deep. 

“No, this is not going to be a short and shallow recession, it’s going to be deep and protracted,” he said in an interview with the Financial Times.

Larry Summers: Former Treasury Secretary Lawrence H. Summers, in early December, warned there is a long way to go in getting inflation down to where the Federal Reserve wants it.

He also highlighted that achieving a soft landing may be much harder than thought. “My sense is that it's much harder than many people think to achieve a soft landing b/ there are all these mechanisms that kick in. At a certain point, consumers run out of savings. Then you have a Wile E. Coyote kind of moment where consumption falls off,” Summers explained.

The professor also believes the rest of the world will "suffer greatly" if the U.S. does not control inflation and rates ultimately rise far above current levels, much like how things unfurled in the early 1980s. He said that increases in rates and the dollar, along with geopolitical dislocations, are creating serious problems for many developing countries.

“The U.S. should be leading global efforts to resolve sovereign debt problems more quickly and to catalyze higher lending levels from the International Monetary Fund and the World Bank,” he said in his tweet.

Mohamed El-Erian: Allianz chief economic adviser Mohamed El-Erian has been skeptical on some of the high-conviction calls this year which stated a recession in the U.S. is likely to be short. El-Erian cautioned that it was important to keep an open mind on the possible recession’s characteristics.

“Many 'high-conviction' U.S. recession calls are immediately coupled with the assertion that it'll be 'short and shallow.' Reminds me of the behavioral trap 'transitory inflation' proponents fell into last year," El-Erian had tweeted. "Critical to keep an open mind on the possible recession's characteristics."

The noted economist also believes inflation is going to remain sticky and that when it reaches 4%, there’s going to be a major decision to be made by society on what the next steps would be.

“We are not going back to where we came from — for many reasons. One is the unintended consequences of a ridiculous regime of very low interest rates and infinite QE. Inflation is not going to come down in an overly fashion. We are going to get sticky inflation,” El-Erian said on Bloomberg TV.