Economic bubble will go on growing: Krugman

The economic bubble will continue to grow in 2015 mainly due to big gap in supply and demand in China and Japan which are the two largest economies in East Asia, said Dr Paul Krugman, Nobel Prize winner in Economics, in Dubai on Sunday.

Addressing the seventh Arab Strategy Forum, Dr Krugman said that economic recovery is still uncertain due to many reasons including the increasing international debt and low industrial production.

Dr Krugman said: “There's a big gap in supply and demand in the two largest economies in East Asia - China and Japan. This is the main reason the economic bubble will continue to grow. If Japan – which has a lot of advantages in being a relatively large country with a strong economy, stable government and solid infrastructure - is still making an effort to break out of this deflation trap, then other countries will definitely struggle to do so. However, China is going to suffer more for not having in place as strong a government coherence and systems integration as Japan does. In addition, China is witnessing an accelerating deflation that is going to prove hard to contain.”

Looking ahead at the economic state of the world in 2015, Dr Krugman’s projected that there would be no increase in interest rates in 2015; Japan economy will continue shrinking and problems for China economy; and the euro zone will witness a political and economic crisis.

Dr Krugman commenced his presentation with a focus on how to lower international debt. He said that this process had not seen much success so far. As a result, he did not expect interest rates to increase during 2015.

Dr Krugman noted that Central banks would need to think very carefully before taking such a step.

Commenting on sustained decline in crude prices, he said the countries that might suffer greatly from low oil prices in 2015 are the oil producing countries that do not have large oil reserves

Speaking about the volatility of oil prices, Dr Krugman said: “The decline in oil prices is caused by the drop in demand due to weaker economies on one hand, and the contrast in oil prices between the major players in the world. The countries that might suffer greatly from the problem of low oil prices in 2015 are the oil-producing countries that do not have large oil reserves."

Looking ahead at the economic challenges in 2015, Krugman said: "Global crises often surface where you least expect. The euro zone will witness a political economic crisis. Greece will end up exiting Europe and there will be a contagious effect.”

Speaking about the US economy, which has the biggest influence on world economy, Dr Krugman said: “Statistics show that the United States made significant progress with regards to reducing unemployment - not because more job opportunities were created, but due to fewer people looking for jobs for a variety of reasons. This might be another indication that the US economy is currently a fairly depressed economy unlike what most indications show or say.”

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